Chapter 11 — Further Reading

Income documentation is the most frequently revised material in origination. Every source below that carries a number — a history length, a continuance window, a gross-up percentage, a threshold — is revised on its own schedule. Read the guides themselves, not summaries of them, and read the current version.

If you read only one thing

The income assessment sections of the Fannie Mae Selling Guide (Part B3-3, Income Assessment — confirm current section numbering). It is free, it is public, it is searchable, and it is the actual rulebook behind roughly everything in this chapter for conventional lending. Read the employment-income sections end to end once, slowly, with this chapter's three questions in front of you. You will see the same three questions organizing material you had assumed was arbitrary — and you will never again have to guess at a rule you could have looked up in ninety seconds.

Then bookmark it. The single most useful professional habit in income analysis is looking things up rather than remembering them.

Tier 1 — Verified canonical

The agency guides (the operative rulebooks)

• Fannie Mae Single-Family Selling Guide — income assessment, employment and other sources of income, and the documentation requirements for each income type (Part B3-3). Published free and updated continuously.
• Freddie Mac Single-Family Seller/Servicer Guide — stable monthly income and asset qualification sources (Topic 5300 series; confirm current numbering). Free and continuously updated.
• HUD Handbook 4000.1, FHA Single Family Housing Policy Handbook — the origination-through- post-closing sections governing effective income for FHA files, including the treatment of overtime, bonus, part-time, and non-taxable income.
• VA Lender's Handbook, VA Pamphlet 26-7, credit underwriting chapter — income and residual-income analysis for VA files, including the treatment of military entitlements and allowances.
• USDA Single Family Housing Guaranteed Loan Program Technical Handbook (HB-1-3555) — income analysis for guaranteed rural housing loans, which distinguishes annual, adjusted annual, and repayment income in a way that surprises originators coming from conventional lending.

Statutes and regulations

• Truth in Lending Act (TILA) and Regulation Z, in particular 12 CFR 1026.43, the Ability-to-Repay/Qualified Mortgage standards, effective January 10, 2014 — the source of the requirement to verify income and assets using reasonably reliable third-party records, and the reason stated-income lending ended for covered transactions. Read the official interpretations (commentary) alongside the rule text.
• Dodd-Frank Wall Street Reform and Consumer Protection Act, Title XIV — the statutory mandate behind the ATR rule.
• Equal Credit Opportunity Act (ECOA) and Regulation B, 12 CFR Part 1002 — what you may and may not ask about income, the prohibition on discounting income because of its source, and the requirement to inform an applicant that alimony, child support, and separate maintenance need not be disclosed unless the applicant wants them considered.
• Fair Credit Reporting Act (FCRA) and the Gramm-Leach-Bliley Act (GLBA) — authorization and safeguarding obligations attaching to the verification documents in this chapter.
• Consumer Financial Protection Bureau (CFPB) — the ATR/QM rule, its amendments, and the Bureau's published compliance guides for small entities, which are unusually readable.

Forms

• Fannie Mae Form 1005, Request for Verification of Employment — the written VOE, including the base / overtime / bonus / commission breakout and the employer's continuance statement. Freddie Mac publishes an equivalent.
• IRS Form 4506-C, IVES Request for Transcript of Tax Return — the borrower's authorization for the lender to obtain transcripts through the Income Verification Express Service. The IRS has revised this form and the surrounding process more than once; confirm the current version.
• IRS transcript types — the tax return transcript and the wage and income transcript, and what each contains. The IRS publishes descriptions of all transcript types.
• Uniform Residential Loan Application (Form 1003 / URLA) — note how the employment and income sections require base, overtime, bonus, commission, and military entitlements to be reported separately. That structure is this chapter's rules made into a form. (Chapter 9.)

Tier 2 — Attributed, specifics unverified or perishable

• Your employer's income calculation worksheet and overlay matrix. Lender-specific, frequently stricter than the agency guide, and the actual standard your file will be measured against. Get the current version from your underwriting or compliance team and ask when it was last revised.
• Automated underwriting findings messages as a documentation source. The findings frequently specify a reduced documentation set. Whether to collect only that set is a judgment call — see Exercise 11.30 — and the findings are only as good as the data entered. (Chapter 15.)
• Third-party employment and income verification databases (The Work Number and comparable services). Coverage depends on employer participation; costs, data freshness, and what the report actually contains vary by vendor and by employer. Verify what your lender accepts.
• Gross-up percentages for non-taxable income. Program-specific, revised, and in some programs tied to the borrower's documented tax situation. There is no single correct number and this book deliberately does not print one. Look it up per file, per program, every time.
• History-length and continuance requirements for overtime, bonus, commission, part-time work, seasonal work, support income, and retirement distributions. All are commonly stated as this chapter describes them and all vary by agency, program, and findings. Confirm before you rely on any of them.
• The commission share-of-income threshold (commonly discussed at 25%). Treatment has changed and differs across agencies and products.
• Vacancy and maintenance factors for rental income (commonly 25%, i.e. 75% of gross counts) and the documentation path when there is no tax-return history. Program-specific.
• NMLS SAFE MLO Test Content Outline — published by the NMLS and the source of what the exam actually covers on income calculation. Use it to focus exam preparation rather than studying everything at equal weight. (Chapter 3.)
• Continuing-education courses on income calculation. The best of them are hands-on: a stack of paystubs, W-2s, and VOEs, worked out loud. The worst are a recital of thresholds that will be stale before your certificate prints. Choose the first kind.
• Industry coverage of the 2020 verification disruption and the agencies' temporary flexibilities. Useful for understanding how quickly verification standards can move; not a source for current requirements, since the flexibilities were retired.

Tier 3 — Illustrative and constructed (this book)

• The Linden Street file — all income figures: \$5,720.00 and \$580.00 for Borrower 1, \$2,400.00 and \$1,800.00 for Borrower 2, the \$10,500.00 total, the two years of W-2 variable figures (\$6,720/\$7,200 and \$19,800/\$23,400), the paystub in Figure 11.1, and the worksheet in Figure 11.2. Constructed for teaching.
• The Fulton Avenue file — \$109,500 and \$107,000, the \$9,020.83 average, the \$8,916.67 most recent year, the 2.3% decline, and the accountant's "about \$9,500." Constructed; the underlying cash-flow analysis is Chapter 32's.
• The composite file in Case Study 11.2 — the furloughed restaurant manager, the \$6,200.00 qualifying income, the 42.74% ratio, and the sunk costs. A labeled composite built from documented industry patterns, not a real borrower.
• The day-40 file in §11.10 — \$7,400.00 income, \$3,050.00 obligations, 41.22% becoming 46.92%, and the illustrative \$375.00 lock extension. Constructed.
• The gross-up example in §11.7 — the 15% and 25% figures are used solely to demonstrate the arithmetic and are not guideline values for any program.
• All rental, seasonal, and exercise figures throughout the chapter.

Related chapters

Chapter 4 (gross monthly income, PITI, and the ratios this chapter produces the denominator for) · Chapter 9 (the URLA's employment and income sections) · Chapter 10 (credit, the other half of the verification core) · Chapter 12 (assets, the large-deposit rule, and the \$4,900 commission deposit) · Chapter 14 (the conventional rulebook, guidelines versus overlays, reps and warrants) · Chapter 15 (automated underwriting and what the findings say about documentation) · Chapter 16 and Chapter 17 (FHA, VA, and USDA income treatment) · Chapter 25 (fair lending and how you may ask about income) · Chapter 27 (income misrepresentation, from the detection side) · Chapter 32 (self-employed income, in full) · Chapter 34 (non-QM, including alternative documentation).