Appendix F — Underwriting Guideline Quick Reference

Organized by the question the underwriter is actually asking, not by the order the rulebooks print them in. An underwriter does not work through a guide from front to back; they work through a file asking a short list of questions, and every condition they write is one of those questions coming back unanswered. Learn the questions and you can predict the conditions before the file is submitted — which is the whole of Chapter 14.

⚠️ EVERY THRESHOLD IN THIS APPENDIX IS PERISHABLE. Waiting periods, ratio benchmarks, gross-up percentages, large-deposit triggers, reserve requirements, and score minimums are all revised — some annually, some by bulletin, some by a single lender on a single Tuesday. The durable content here is the structure: what an underwriter is trying to establish, and what kind of evidence establishes it. Every specific number below is marked [illustrative]. Verify at the source: the Fannie Mae Selling Guide, the Freddie Mac Seller/Servicer Guide, HUD Handbook 4000.1 and current Mortgagee Letters, the VA Lender's Handbook, and USDA Rural Development handbooks and notices.

F.1 The five questions

Questions 1–4 are creditworthiness. Question 5 is eligibility. They are answered separately, they fail separately, and confusing them is the single most common reason a loan officer misreads a decline (§F.12).

F.2 "Can I count this income?" — the three-part test

Every income question in mortgage underwriting resolves into the same three parts. Apply them in this order and you will rarely be surprised by a condition.

Fail any one and the income does not count. A borrower can have received \$3,000 a month for eleven years and have it excluded because the source is ending in eighteen months (continuance). A borrower can have a perfectly continuing income excluded because it arrives as cash (documentation). And a genuinely documented, genuinely continuing income can be excluded because it started four months ago (stability).

The most useful thing you can tell a borrower is that underwriting counts demonstrated, documentable, likely-to-continue income — not what they make. Those are different numbers, and on variable-income files they are different by a lot.

F.3 Income by type — the working table

[all history and continuance periods illustrative — verify at the source]

F.3.1 Two arithmetic traps

Pay frequency. Bi-weekly is 26 pay periods a year; semi-monthly is 24. They are not the same and the difference is real money.

Multiplying a bi-weekly check by 2 understates income by roughly 8.3% and is the most common income error in the business.

Hourly. 2,080 hours is 40 hours × 52 weeks. On the Linden Street file, Borrower 1's base is \$33.00 × 2,080 ÷ 12 = \$5,720.00 (§11). The hours must be guaranteed; if they are not, the income is variable and gets averaged.

F.3.2 Variable income — the rule and what it costs

Average over 24 months. If the trend is declining, use the lower or the most recent figure. Never annualize an upward trend.

The Linden Street file shows both directions at once:

The conservative 24-month rule costs this borrower \$150.00 a month — about 60 basis points of back-end ratio. That is not a mistake in the rule; it is the rule doing its job. Two years of a rising trend is not proof it continues, and the underwriter is pricing the possibility that it does not.

⚠️ The one to watch: how much of the household's income is variable. On Linden Street it is \$2,380.00 of \$10,500.00 = 22.67%. Under a quarter of income being variable is comfortable. Half is a different conversation, and it is the conversation an underwriter will start whether or not the ratios pass.

⚠️ A deposit of variable income is not additional income. The \$4,900 commission deposit sourced on Linden Street day 33 is already inside B2's 24-month average. It is an asset-sourcing condition and nothing else. Counting it again as income is a double-count and it is a mistake made in good faith constantly.

F.3.3 Gross-ups on non-taxable income

Income that is not taxed — much Social Security, certain disability and public assistance, some military allowances — may be grossed up so it is compared fairly against taxable income in a ratio built from gross figures.

The gross-up is not a favor and it is not optional judgment — it is a specified adjustment with a specified percentage, and applying the wrong one produces a wrong ratio in the borrower's favor, which is worse than one in their disfavor. Confirm the income really is non-taxable before grossing anything up.

F.3.4 Alimony paid — a debt, or a reduction to income?

Some conventional guidance permits alimony paid to be deducted from gross income rather than counted as a monthly obligation. The two treatments do not produce the same ratio, and the difference usually favors the borrower [constructed teaching example]:

Same borrower, same alimony, five points of ratio. Whether the option is available is a program question — verify it before you promise it. Child support paid is generally a debt, not a reduction.

F.4 "Where did this money come from?" — assets

An underwriter is asking two things about every dollar: is it the borrower's, and is it available. Sourcing answers the first. Seasoning answers it a different way — money that has sat in an account for months has already answered where it came from.

Earnest money is an asset like any other. It must be sourced even though it left the account before the file existed. On the Linden Street file the \$5,000 earnest money was paid on day 4 and is not part of the \$38,000.00 verified**; the borrowers held \$43,000 and \$38,000.00 is what remained. It appears as a credit** in cash to close because it was already delivered, and treating it as inside the \$38,000.00 would understate reserves by \$5,000.00 (§4.9, §A.9).

F.4.1 Large deposits

  A DEPOSIT APPEARS ON THE STATEMENT
        |
        +-- Is it payroll, matching the paystubs?  --> no condition
        |
        +-- Is it seasoned past the lookback?      --> generally no condition
        |
        +-- Does it exceed the program's "large"
        |   threshold, or does it simply look odd
        |   to the underwriter?
        |        |
        |        +-- SOURCE IT: letter of explanation
        |            + the document that proves the origin
        |            (commission statement, sale document,
        |             transfer record, gift letter)
        |
        +-- Cannot be sourced --> the funds are BACKED OUT
                                  of available assets

The thresholds differ by program and both are perishable [illustrative — verify]:

Run Linden Street through both. The \$4,900 deposit is **46.67%** of \$10,500.00 of income — under the conventional trigger — and it is \$4,900 against 1% of \$385,000 = \$3,850 — over the FHA one. The underwriter conditioned it anyway, and cleared it on day 33 with a letter of explanation and the commission statement showing a \$6,900 gross quarterly commission less \$2,000 of withholding.

That is worth sitting with. A condition can be written because a rule requires it, or because an underwriter wants to see it. Both are legitimate; they are not the same thing; and knowing which one you are looking at is the difference between "here is the statement" and a pointless argument. See §F.13.

⚠️ The consequence of an unsourced deposit is not a decline — it is subtraction. The underwriter simply removes the money from available assets and re-runs the file. Sometimes the file still closes. That is why "just leave it, they won't notice" is such a bad instinct: the fix is usually one document, and the failure to produce it can cost the borrower their reserves.

F.4.2 Gift funds

⚠️ "No repayment is expected" is the operative clause. A gift that must be repaid is a loan, the payment belongs in the ratio, and a gift letter that says otherwise is a false document. This is the place where a well-meaning family arrangement becomes a compliance problem, and the loan officer is the one who has to say so.

On the Linden Street file the \$10,000 gift from Borrower 1's parents was documented under Condition 6 — gift letter signed by donor and recipients plus evidence of transfer — and cleared on day 29.

F.4.3 Reserves

Reserves are stated in months of PITI, and they are the most portable compensating factor there is (§A.9).

Nothing about the approval changed when reserves fell from 4.16 to 2.45 months — but the cushion did, and on a program that required six months it would have been fatal. Reserves are what the file has left after everything goes as planned. Ask what happens if it doesn't.

F.5 Self-employed income and the Form 1084 add-back logic

Learn this as a principle, not as a form. Forms are reissued; the logic underneath them has not changed in decades:

Add back what was deducted and did not leave the business. Subtract what left the business and was not deducted.

That one sentence generates the whole worksheet. Everything else is knowing which side of it a given line falls on.

Where the income comes from depends on the entity — Schedule C for a sole proprietorship, Form 1065 and K-1 for a partnership, Form 1120S and K-1 plus W-2 wages for an S-corporation, Form 1120 for a corporation. The 4506-C and the resulting tax transcripts confirm that the returns given to the lender are the returns filed with the IRS, which is the entire point of asking for it (§32).

F.5.1 The Fulton Avenue worksheet

S-corporation, six-employee residential HVAC, two years of returns (§32.7):

Why the lower figure governs. When income rises, the average is the conservative number and the average is used. When income declines, the average is the optimistic number — it is propped up by a year that is not coming back — so the underwriter drops to the most recent year. The rule is not "use the average"; the rule is use the conservative figure, and which one that is depends on the direction of the trend.

⚠️ The borrower's accountant said "about \$9,500 a month." The accountant is not wrong about the business; they are answering a different question. An accountant measures what the business produced. An underwriter measures what a lender may rely on for thirty years, after subtracting everything that might not repeat. Explain that difference at application, before the borrower has anchored on a number you cannot deliver. It is one of the most valuable conversations in the job.

F.6 "Has this borrower repaid before?" — credit

Linden Street: Borrower 1 at 742 / 738 / 751 → middle 742. Borrower 2 at 706 / 712 / 698 → middle 706. The representative score is 706, the lower of the two middles. Four revolving accounts, \$8,400 in balances, \$212 in minimums, no lates in 24 months, no public records, no collections.

Harlow Street sits at the other end: a 641 representative score, single borrower, single income, ratios of 41.48% / 51.00% against a 31/43 manual benchmark [illustrative — verify in Handbook 4000.1] — a file that exists only because the TOTAL Scorecard returned an Approve/Eligible and the compensating factors were documented.

F.7 Credit events — waiting periods and their exception paths

⚠️ THE YEAR COUNTS BELOW ARE ILLUSTRATIVE AND ARE REVISED. What is durable is (a) which events have waiting periods, (b) the date the clock starts from, and (c) that an exception path exists and requires documentation. Verify every period in the Selling Guide, the Seller/Servicer Guide, HUD Handbook 4000.1, or the VA Lender's Handbook before you quote it.

The date almost everyone gets wrong is the completion date. A borrower will tell you they "lost the house in 2019" because that is when they moved out. The foreclosure may not have completed until years later. The clock runs from completion, not from the last payment, not from the notice, not from the move-out — so pull the credit report and the public record and find the actual date before you tell anyone when they are eligible. Getting this wrong in either direction is expensive: one way you turn away an eligible borrower, the other way you take an application that cannot close.

F.7.1 The exception path

Nearly every waiting period has a shorter version for extenuating circumstances, which the agencies define narrowly and consistently:

What the exception actually requires is three things, and loan officers routinely deliver only the first: a written explanation from the borrower; third-party documentation proving the event and its timing — termination notice, medical records, death certificate, court order; and evidence that credit has been re-established since. A letter of explanation alone is not an exception path. It is a letter.

FHA has at times operated additional frameworks for borrowers affected by documented economic events; whether such a policy is currently in effect is exactly the kind of thing to verify in the current Mortgagee Letters rather than to remember.

F.8 "Can they carry it?" — ratios and compensating factors

$$\text{Housing} = \frac{\text{PITI}}{\text{gross monthly income}} \qquad \text{Back-end} = \frac{\text{PITI} + \text{other monthly debts}}{\text{gross monthly income}}$$

Counted in the numerator: the full proposed PITI including MI and HOA · auto loans and leases · student loans per program rules · revolving minimums · installment and personal debt · alimony and child support paid · other properties' full PITIA · co-signed debts unless documented as paid by another for the required period.

Not counted: utilities · groceries · childcare · payroll-deducted health insurance · income taxes · 401(k) contributions and 401(k) loan repayments · savings.

The ten-month rule: an installment debt with roughly ten or fewer payments remaining may generally be excluded [illustrative — program-specific]. It does not apply on Linden Street (31 and 19 payments remaining) — though excluding B2's \$429.00 auto payment would drop the back-end from 42.66% to 38.58%, which is exactly why borrowers ask.

There is no single DTI cap (§4.5). The CFPB removed its own 43% General QM limit, and what binds a given file is the automated finding or the investor matrix in front of you.

F.8.1 What a compensating factor actually is

A compensating factor is a documented strength that offsets a specific, named weakness. It is not an impression.

Not compensating factors, however often they are offered: "they've never missed a payment" — that is the credit score, already counted; "the appraisal came in above contract" — the loan is made on the lesser of price or value; "they're really responsible people"; "they're getting a raise next year."

⚠️ Name the weakness before you name the offset. A compensating factor written into a file without an identified weakness reads as padding. Write it as a pair: the housing ratio is high at X%; the borrower has been paying within \$Y of this payment for Z months and holds N months of reserves. That is an argument. A list of adjectives is not.

F.9 Layered risk

Single risk factors are manageable. Layers multiply. An underwriter is not scoring your file on its worst line; they are looking at the whole stack, and a file with five moderate weaknesses can be declined when a file with one severe weakness is approved.

The layers underwriters actually count: high LTV · high DTI · low reserves · variable or recently changed income · high payment shock · low or thin credit · gift-funded down payment · non-occupant co-borrower · unusual property · declining self-employed income.

Linden Street, honestly stacked:

Four risk layers, four offsets. That is why the file was approved, and it is also why the day-44 furniture debt was nearly fatal — it did not merely push the back-end from 42.66% to 48.48%; it converted a file with offsets into a file with five layers and one fewer offset. Condition 11, written on day 28, existed precisely to catch it.

Harlow Street, for contrast: a 641 score, 41.48/51.00 ratios, a single income, a DPA-funded down payment, and a 101.15% CLTV — layers with very little underneath them, approvable only on an Approve/Eligible from the TOTAL Scorecard with the compensating factors documented in the file.

F.10 The debt side — where obligations actually come from

Business debts may sometimes be excluded when paid by the business and documented with twelve months of cancelled checks or statements showing the business as payer, with no recent delinquency [illustrative — verify]. That exclusion is worth knowing on every self-employed file.

F.11 The refresh — the condition that catches what changed

Almost every file carries a pre-closing credit refresh or undisclosed-debt monitoring condition as a prior-to-funding item, and a verbal verification of employment within a required window before the note date. Both exist because underwriting approves a snapshot and closing funds a file — and things happen in between.

On Linden Street the refresh on day 44 found a furniture account opened day 41: \$5,200.00 balance, \$611.00 a month, a nine-month promotional plan. Back-end went 42.66% → 48.48%. The resolution — paid in full from reserves, closed, with a zero-balance letter and a paid-in-full statement — returned DTI to 42.66%, dropped reserves to 2.45 months, and cost four business days.

The loan-officer lesson is not "check the refresh." It is to say, at application and again at approval, in these words: do not open any new credit, do not finance anything, do not co-sign, do not change jobs, and do not move money between accounts without telling me first. Every one of those is a file that closed late or did not close.

F.12 Eligibility versus creditworthiness — read the second word first

Automated underwriting returns two independent verdicts, and they answer different questions (Chapter 15):

Creditworthiness is the first word: income, assets, credit, capacity. Eligibility is the second: loan amount against the limit, LTV against the maximum, occupancy, property type, product.

Why this matters more than almost anything else in this appendix. The two failures have completely different fixes.

• Approve/Ineligible — change the loan. Reduce the loan amount below the limit, increase the down payment to get under the maximum LTV, switch to the program whose box this loan fits. The borrower does not need to do anything about their credit, because their credit was never the problem.
• Refer/Eligible — change the story, or underwrite it by hand. Document the compensating factors, reduce a debt, add a documentable income, explain the derogatory with third-party evidence.

Linden Street ran on day 6 and returned Approve/Eligible — both verdicts clean — which is why the file's later trouble came from an event rather than from a structural flaw.

F.13 Guideline or overlay? — the most useful question about any decline

So ask the question, every time, in these words: "Is that the agency's rule or ours?"

It is the most useful question a loan officer can ask about a decline because the two answers point in opposite directions:

How to ask without picking a fight. Do not ask the underwriter whether they are being unreasonable. Ask for the citation: "Can you point me to the guideline section on that so I can explain it to the borrower?" If the answer is a Selling Guide reference, it is a guideline. If the answer is "that's our credit policy," you have your answer and you did not have to argue for it.

⚠️ The line you do not cross. Moving a file to a lender without a particular overlay is legitimate and is part of the job. Restating the facts of a file to get around a guideline is fraud. The difference is whether you changed where the file went or what the file said (Chapter 3). If you cannot tell which one you are about to do, you already know.

Know your own overlays before you take the application. The worst version of this conversation is the one where a loan officer discovers at underwriting, three weeks in, that their own shop will not do what they promised on day one. Ask for the overlay matrix. Read it. Keep a second outlet for the files it excludes.

F.14 The conditions an underwriter writes, and when

Conditions are the underwriter's five questions returning as homework. They come in two timings, and mixing them up is how files miss closing dates.

Linden Street's conditional approval on day 28 carried eleven conditions — six borrower, two third party, three lender; nine PTD and two PTF. The nine PTD conditions cleared between day 29 and day 33 — five calendar days but only three business days.

⚠️ Then nothing happened for eleven days. Day 33 to day 44 is the file's real failure, and it is not an underwriting failure. It is a follow-up failure, and it belongs to the loan officer.

F.15 Verify before you quote — the source list

The habit that separates the professionals. When a rule surprises you, do not repeat it — find it. When a borrower asks for a threshold, do not recall it — look it up in front of them and say so out loud. It takes ninety seconds, it is the difference between advice and a rumor, and the borrower will trust the number more precisely because you checked.