Written By: Frankie Lacy, Op-Ed Writer
In the days of CFPB debt ratio thresholds and tighter lending restrictions, every underwriter needs to have a few tricks up their sleeve for saving debt ratios. Usually we try to use the more conservative income calculation to avoid investor push-back. However, there are a few perfectly provable income sources that we can use to support a lower debt ratio and return an approve/eligible or accept finding.
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BUSINESS MILEAGE
Business mileage is often found on page two of schedule A or schedule C. This is a debt ratio saving “add-back” that can be used if evidenced with a two year history on the personal tax returns. When your borrower is an independent contractor or a commission based sales person, it is very likely they are writing off business mileage.
To add back business mileage you must first determine the standard mileage rate depreciation component for the relevant tax year. This information can be found at http://www.taxalmanac.org/index.php/Standard_Mileage_Rates. For example, the depreciation component for 2013 is 23.0. If the borrower’s 2013 schedule A shows 10,000 business miles, the calculation would look like this: 10,000 miles X 0.23 depreciation component = $2,300 add back for the 2013 tax year. Just as with all income, be sure to verify a trend of stable or increasing business mileage over the two years tax returns. If the business mileage is decreasing, do not use this as an add back.
OVERTIME AND BONUS
If you are qualifying the borrower using their base income alone, go back through paystubs and W2’s to see if there is an overtime or bonus earnings trend. If you can tell that the W2 earnings for previous years exceed the annual base income, request a written verification of employment. This form will allow you to clearly determine if there are overtime or bonus earnings year-to-date and in previous tax years.
If this income appears to be stable or increasing from year to year, execute a 24 month average to use for qualification. Examine the year-to-date (YTD) earnings specifically on overtime income to determine those earnings are supported in the current year.
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For example, if you have determined that there are $500 monthly overtime earnings using a 24 month average for 2013 and 2012, perform a YTD average to insure $500 per month is continuing. The calculation is as follows:
-Use the last pay period ending date to determine how many months have passed YTD. In this case, if the pay period ended on 4/30/2014, it is four months.
-If there are $2,500 overtime earnings YTD, divide $2,500 by 4 months to get $625 per month.
-As a result, it can be said the 24 month average overtime earnings of $500 per month are supported by YTD overtime earnings.
About The Author
Frankie Lacy - As an op-ed writer, Ms. Frankie Lacy is a 15+ year mortgage industry veteran with extensive conventional mortgage underwriting experience. Topics of Frankie's expertise include: Fannie Mae, Freddie Mac, USDA Rural Housing, underwriting to investor overlays, self-employed borrowers, personal and business tax return analysis, rental income, condos/co-ops/PUDs, and more. Frankie is a Davenport University graduate with a degree in Business Administration.
