Zone of confusion

Most of us have yearly traditions, for example I completed my second year of spending New Years Eve in Florida versus good old snowy Michigan!  Although this is a new tradition, I looked forward to it this year, and have it blocked off my calendar for 2022!

Some traditions are not quite as fun, but necessary.  Examples like taking down the Christmas decorations, getting your taxes ready, and NOT falling into the “zone of confusion” for income documentation during the first quarter of the year!

The zone of confusion consists of two areas, the first is “Wild YTD calculations” the second is what documentation is required! Today we are going to cover the documentation part BUT I have written a blog previously about the “Wild YTD Calculations” you will encounter. Check that BLOG HERE

Documentation Employed Borrowers

Employed Borrowers Who Apply Between Jan 1st and Jan 31st

First we will start with what is required taken right from the source! Here is what Fannie Mae has on the topic, and most agencies are the same


The paystub must be dated no earlier than 30 days prior to the initial loan application date and it must include all year-to-date earnings. Additionally, the paystub must include sufficient information to appropriately calculate income; otherwise, additional documentation must be obtained.

If your borrower provides you with a paystub dated in December and the 2019 / 2018 W-2 you have what you need, provided the paystub isn’t any older than 30 days prior to application.

Some mortgage professionals get into January 2021 and ask for the 2020 W-2, that is NOT needed!  Legally employers have until Jan 31 to issue current year tax forms, so asking for documents the borrower may not have will just confuse things. Can they provide the 2020 W-2 and paystubs less than 30 days old in January, sure if they have it, but again not required!

I know the second question is, “But what if the borrower applies in January but closes on March 1st?”  Keep in mind MOST income documentation is based off of application dates NOT settlement or note dates.  There is a maximum age date as well which expires a paystub at 120 days, currently reduced to 60 days due to the special COVID-19Rules at the time of this writing.

Employed Borrowers Who Apply February 1st or later

The “trick” to what the guideline says above, is the words “sufficient information”.  Normally any paystub that has a pay period end date on February 1st or later just the single paystub will do. before we get to the paystub issue, when a borrower applies on or after February 1st they will need to provide the 2020 W-2, at this point the IRS mandates employers have these in the hands of their employees. February 1st for employed borrowers marks the first day of the 2020 /2019 years as “most recent year & previous year”.

In regards to the paystubs January this can get a bit grey, when borrowers give you paystubs dated in January that DO NOT have a full 30 day year-to-date history on them. This 30 day history used to be required, now the guidelines say sufficient information. but don’t really define what that means.  

What  is the sufficient information you must see?

  • You can clearly identify if the borrower has steady hours (25,30,40 etc) or works variable hours
  • You can clearly identify if the pay period is weekly, biweekly, semimonthly, or monthly
  • You can clearly identify if the borrower has debts or garnishments taken out of their pay

Another side of the coin that you may run across if you don’t have a full month of data on a paystub is debt payments, most payments are taken out once per month.  My question then becomes, “What if you have the January 22nd paystub but the $500 car payment the borrower has is on auto pay is deducted last day of every month?”

Alimony & Child Support are also a very common deduction you may need to see a full month to confirm an amount, generally the frequency as the pay periods (weekly , bi-weekly, etc) is how the person pays their support payments. Both of these situations could mean you miss a debt and have excessive DTI when you close the loan.

Documentation of Self Employed Borrowers

Self Employed Borrowers Who Apply  Between Jan 1st & April 15th

The key phrase to remember about self employed borrowers is what these two dates mean:

  • Most Recent Year Filed Tax Returns
  • Previous Year Filed Filed Tax Returns

Example: If we are in 2021 and the current date is between Jan 1st and April 15th 2021 this means 2019  is the most recent year and 2018 would be the Previous Year

The IRS does not require your personal returns until April 15th which is AFTER the business returns required completion on March 15th.  Keep in mind YOU CAN NOT complete your personal tax returns UNTIL you have completed the business returns.

The reason for this is because you must report your final business income on your personal returns for Schedule C / F / K-1 from 1065 and K-1 from 1120S. The exception to that rule is the 1120 corporation since it is truly a “separate entity”.

That means you only need a 2019/2018 + Profit and loss statement for 2020 UNTIL the borrower files their 202 taxes and the lender confirms IRS receipt of those taxes.  At that point it will become the 2020 (most recent year) and the 2019 (previous year) returns.

Just like the employed borrowers there is a limit to how late you can close this loan using the 2019/2018 returns with 2020 profit and loss.  Here is the guidance on what happens from April 15th up to June 30th 2021


The previous year’s tax return (the return due in April of the current year) is recommended, but not required.

The lender must ask the borrower whether he or she has completed and filed his or her return with the IRS for the previous year. If the answer is yes, the lender must obtain copies of that return. If the answer is no, the lender must obtain copies of tax returns for prior two years.

Bottom line, do your best to make sure you have the most recent filed tax return when you get the borrower closed.  Legally you don’t need it, but keep in mind that if you are audited and the investor finds out that the borrower did in fact file the 2020 return prior to close…that is fraud that will come back to the submitting lender for a possible buy back!

Self Employed Borrowers Who Apply  Between  April 15th & Oct 15th 2021

After we cross over April 15th 2021 and up to October 15th 2021 the most recent year is now considered 2020 with the previous year at 2019 and the P/L’s will cover 2021 full months .  If the borrower filed an extension, provide evidence of that extension plus a P/L covering from Jan 1st 2020 up to the most recent month.

Hopefully this blog will get you off to a great start of the tradition of avoiding that zone of confusion for income documentation in the new year! 

Welcome to 2021!  

4 Responses

  1. Michael, please explain why the Fannie Selling guide’s worksheet 1038 adds depreciation on the rental property back on to calculate rental income, and your software doesn’t? Is it something that was overlooked? Depreciation is a tax deduction (at least for the duration of active rental operation) that actually increases cash flow while the blueprint makes it look like it is an actual expense to the borrower.

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