Over the last twelve months I have been confronted with quickly learning the in’s and outs of Fannie Mae Day 1 Certainty program, this blog is just about the income portion. I have to say I am a huge fan of the product, but just like any other technology, a lack of understanding of what it can and cannot do is an expensive lesson.
Here are my Top 3 lessons that took quite a bit of research and experience to make sure I had it right, hopefully this list will save you and your team some trouble!
Lesson 1
Day 1 will use annualize method of income trending
Day 1 uses a “divide by 12” regardless of the month trending method on overtime, commission, bonus, and tips which will cause the “actual” income not to validate. For example if you have a borrower with overtime, and the following information is presented:
2018 OT as of 04/30 2017 Overtime 2016 Overtime
$4,000 $12,000 $10,000
Day 1 Result
$4,000 over time / 12 months = $333.33 p/mo in “validated income”
Standard Underwriting Result
($4,000 YTD + $12,000 2017 )/ 16 months = $1,000 p/mo in “validated” income.
OR
($4,000 YTD + $12,000 2017 + $10,000 2016) / 28 months = $928.57 p/mo in “validated” income
As a best practice if the borrower can qualify at $333.33 per month take the Day 1 guarantee and move on. BUT I have seen loans declined due to Day 1 not validating income of either $1,000 per month or $928.27 per month, both of which are acceptable incomes based on guidelines.
Bottom Line don’t decline good loans based on “safe” averages
Lesson 2
Day 1 validates income in segments
When submitting an employed borrower with mixed income types, Day 1 may not validate every type. For example, if you have a borrower with base income, overtime, and bonus income, Day 1 may only validate the base pay. The good news is the reps and warrants will cover the base pay, but if the overtime and bonus are not validated, you can still use those income types ( if they meet the requirements from the selling guide) to qualify your borrower.
Bottom line don’t exclude income sources just because they are “not validated” by Day 1
Lesson 3
lowers the paperwork requirement for “employed by family”
Another document saving step that Day 1 allows is no additional documents need to verify employed by family. If Day 1 validates a borrower’s income AllRegs B3-2-02 dated 03/28/2017 states the following: “When DU validates income, the lender is not required to determine if the borrower is employed by a family member or interested parties to the property sale or purchase”
Bottom line, skip the tax returns on borrowers employed by family members.
See FNMA B3-2-02 dated 03/28/2017
Summary
My final advice is to keep in mind Day 1 is an auditing system, not an underwriting system. Just because the tool does not agree with your income, does not mean your income is wrong. Day 1 is a computer program that takes a very safe look at the income, this is partially why they provide the “guarantee” of reps and warrants.
Also, we have previously written on Day 1 Certainty, and you can read that post here.