Loan Officer Training 07/03/2024 - How to Calculate Variable Income

In this episode of Loan Officer Training, we delve into the intricacies of calculating variable income for borrowers. Understanding and accurately assessing variable income is crucial for ensuring reliable loan approvals. Our expert hosts will guide you through the various types of variable income, such as bonuses, commissions, and overtime, and explain the methods for calculating an average monthly income.

 Learn about the documentation needed, common pitfalls to avoid, and best practices to ensure a thorough and precise evaluation. Whether you're new to the mortgage industry or looking to sharpen your skills, this episode provides valuable insights and practical tips to master the calculation of variable income.

Tune in to enhance your proficiency and support your borrowers with confidence!

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The Mortgage Calculator is a licensed Mortgage Lender (NMLS #2377459) that specializes in using technology to enable borrowers to access Conventional, FHA, VA, and USDA Programs, as well as over 5,000 Non-QM mortgage loan programs using alternative income documentation! 

Using The Mortgage Calculator proprietary technology, borrowers can instantly price and quote thousands of mortgage loan programs in just a few clicks. The Mortgage Calculator technology also enables borrowers to instantly complete a full loan application and upload documents to our AI powered software to get qualified in just minutes!

Our team of over 350 licensed Mortgage Loan Originators can assist our customers with Conventional, FHA, VA and USDA mortgages as well as access thousands of mortgage programs using Alternative Income Documentation such as Bank Statement Mortgages, P&L Mortgages, Asset Based Mortgage Programs, No Ratio CDFI Loan Programs, DSCR Investor Mortgages, Commercial Mortgages, Fix and Flip Mort

Catch all the episodes of the Loan Officer Training Podcast at https://themortgagecalculator.com/Page/Loan-Officer-Training-Series-Podcast

Catch all the episodes of the Loan Officer Training Podcast at https://themortgagecalculator.com/Page/Loan-Officer-Training-Series-Podcast

Loan Officers for Unlimited Free Non-QM Leads & Trainings Join The Mortgage Calculator at https://themortgagecalculator.com/join

The Mortgage Calculator is a licensed Mortgage Lender (NMLS #2377459) that specializes in using technology to enable borrowers to access Conventional, FHA, VA, and USDA Programs, as well as thousands of Non-QM mortgage loan program variations using alternative income documentation! 

Using The Mortgage Calculator proprietary technology, borrowers can instantly price and quote thousands of mortgage loan programs in just a few clicks. The Mortgage Calculator technology also enables borrowers to instantly complete a full loan application and upload documents to our AI powered software to get qualified in just minutes!

Our team of licensed Mortgage Loan Originators can assist our customers with Conventional, FHA, VA and USDA mortgages as well as acces...

Transcript

Restream recording Jul 03, 2024 • 11:10:20 PM 0:13

So welcome everyone. My name is Kyle Hiersche. I'm the COO of the Mortgage Calculator joined here by our sales manager, Jose Gonzalez. And we are a lender that specializes in non QM loans. And what we do every Tuesday, Wednesday, and Thursday evening at 7 p. m. Eastern on this show is a new loan officer training topic. Now tonight we're going to be talking about how to calculate variable income, something definitely necessary for all loan officers to know. So Jose, if you are ready, I'll go ahead and turn it over to you and we can get into your presentation. Good evening, everybody. Thank you for joining us for tonight's training on how to calculate variable income. It's a little bit back to the basics in a way, but with all of the full doc applications that we're getting lately. As the market is turning regarding interest rates, and we are getting a lot of those full dock borrowers that are applying for our conventional FHA, USDA and VA loans where we're usually see this now, we do have full dock borrowers. Non QM loans as well. So that would be applicable for this, but I guess the gist of it is we're getting a lot more full doc loans. So I want to make sure that we're able to properly deal with properly calculating variable income. So what are we referring to when we, uh, speak about variable income? Well, variable income is income that is calculated by an averaging method. Okay. and can vary depending on the situation. Usually variable income, we, per the different guidelines have to average it over the past two years. Now, the only exceptions to this would be, for example, if you received an automated underwriting approval for a one year option, in which case you may not be asked to provide the two years variable income. But you may be asked, depending on the type of variable income that we're talking about, you may be asked for some type of letter documenting that that income is going to continue because that is one of the categories that we're going to cover in a minute. So just note that, or in the scenario where you're doing a non QM loan and you've chosen the one year full doc option, You may still be asked in some cases by underwriting to document the continuity of that income, not provide any other years income, which is going to change your average because you're only using one year's income. So you don't have to average anything, but the continuity is something to consider as you will see shortly in our presentation. Now, what, what are the types of variable income? Well, Listed here are the most common categories of variable income. You're talking about commission, right? Like sales commission. You're talking about tips income in the service industry, our bartenders, our, our servers at restaurants, banquet hall workers, all of those workers get, tips income bonuses. Overtime, bonus and overtime and commission are probably the three most common, categories of variable income. Automobile allowance, capital gains income, interest income, and dividends income. And some of those may be, have a defined, expiration date. Others may have an undefined expiration date, and that's what's going to determine what documentation would be appropriate to, document the income. So with that, we jump right into, the challenges of variable income, right? Our challenges of variable income are the first one. Now, if you know about commissions, over time or bonuses or any other type of variable income. If the income is trending downwards, that's a big problem. now if the income is trending downwards and you are having to average the two years amount, what's going to happen is you're not going to be able to use the higher average of let's say 2022 or the higher income of 2022. If 2023 is income is lower for commissions, For example, you would have to use only the lower 2023 amount. You cannot average a higher prior income amount with a lower current income amount, when we're talking about commission income or any other type of variable income. So if the income is trending downward, that's definitely a challenge. And depending on. How much of a percentage downward it went? You may not be able to use that income at all. Underwriting may say, you know, that's declined too much. We really aren't sure if that's even going to be around next year. So we're not going to use it. And that's, that's their call to do it. The second challenge that you heard me mention a couple of times already is continuity of the income. That's another big challenge. You know, not only that the income may decrease, But then the income may be eliminated, right? Because for continuity of income, you have to doc, your documentation must support a history of receipt of that income and the amount, frequency, and duration of the income. And if the needed history is not provided or the amounts do not support the value, then the income also May not be used, right? If you can't document that, it's going to continue. Now, continuity of income is defined into two categories, right? The first category is the category where the income does not have an expiration date. Right? So for income that doesn't have an expiration date, you need to document the last 24 months. Of history of receipt of that income, but guidelines do state 12 to 24 months of receipt of the income may be considered on a case by case basis. And usually that's going to depend on a written VOE of the employer marking the box is this, income to be expected to continue when they're talking about overtime, when they're talking about, about bonuses, stuff like that, that is, is this. It's expected to continue and the employer can write yes or no and the employer can actually elaborate. I think it's in box number 20. Of the written VOE, the part for the remarks, where they could say yes, and then they could say, yeah, they're gonna, they're definitely gonna get their bonus next year, or they're, they're still gonna get overtime, or they're still gonna be getting commissions, all of those types of statements on a written VOE is what's gonna allow you to get that 12, but less than 24 month time period of receipt of variable income without a defined expiration date to be accepted, and what, and again, the categories we're talking about here, Of variable income without a defined expiration date would be capital gains. You know, you get, you make capital gains on the sale of an asset. So the real estate, so stocks, so bonds, that's all going to give you capital gains. And remember, unless you're a professional home flipper, that's what you do. If you just happen to sell a home this year, you're not going to get capital gains added to your income for analysis purposes from just one capital gains transaction. It has to be a recurring thing. And then bonus overtime and commissions are other, no defined expiration dates. Variable income that is going to be a challenge to be able to, determine the amount. And then the other category of variable income, is those with a defined expiration date. Now, no defined expiration date, you got to document 24 months, the last 24 months that's already been paid, right? Defined expiration date, not only do you have to define. What's already been earned, but you have to be able to document that it's going to continue for a minimum of three more years because maybe it's a depleting asset, for example, right? Like a pension plan or royalties or whatever it may be. So again, I got common categories of variable income without an expiration with a defined, excuse me, variable income with a defined expiration. And it would be. a note receivable, right? You issued a promissory note for somebody to pay you back. That note has a certain payment amount and it has a defined term. Once the term of the note ends, you don't make those, you don't receive those interest payments anymore. So obviously, you know, you would have to provide a copy of the note, but I'm going to get into that in the next slides. These are the ones that have a defined expiration date. Notes receivable, retirement distributions, like from a pension plan, especially, or social security, or royalty payments, right? Royalty payments. You sold a business to somebody and they're paying you monthly royalties for X amount of time and those royalty payments will continue for X amount of time. So again, that's another example of items with a defined expiration date. So, these are our challenges. So, as usual, when we have challenges, I like to provide the solutions. So, first, we're going to have the solutions for documenting variable income with no Defined expiration date. Again, we're talking about bonuses, commissions, overtime, to name the, the popular categories there, and notes receivable, royalty income. We also spoke about those and tips income. So the, the best way, oh, and, and what we have to determine is continuity. If it doesn't have a defined expiration date, we have to determine continuity of the income. And that the income trend is maintaining, right? Those are the challenges, continuity and maintaining the trend. And the best way to, verify and document variable income without a defined expiration date would be a written verification of employment. When we're talking about bonuses, commissions, or overtime, for example, which are the most common categories. We always state when you get that or, or, or nurses, you know, nurses is in variable income. It is one of those weird pay stubs with 10 different pay categories. So whenever we get these more difficult income scenarios like that, or a scenario where we have variable income, always we should, uh, as soon as possible be sending out a written verification of employment to the employer or, retrieving it from the work number. If we determine that the employer participates in the work number, So that then you can get a breakdown in writing of the base income plus the variable income, be it commissions, overtimes, bonuses, whatever it may be. So pay stubs and W 2s or tax returns are also going to assist in this. But, you know, The pay stubs only really if you have like the end of 2022 and the end of 2023, where you can get the exact amount to average it out and then reconcile it to the W2s to make sure that those year end figures total income also match what's on the W2s and then go to the tax returns if needed. But the two year written verification of employment will only work. Always be the best. Cause it's going to give you all that breakdown signed off on by the employer. And usually if you look at your findings, if it's an automated underwriting loan, it's always going to tell you a written VOE or paystubs and W 2s. So, The other items that are not without a defined expiration dates like notes receivable income, interest income, or royalty income, or restricted stock income, those can all be documented with the legal document that pertains to the income. So, for the interest income, you're going to have a note, right? For the royalty income, you're going to have a sales contract. Restricted stock income is usually a one time event. So you're just going to have to get a breakdown of the transaction, on the, you know, whatever was the capital gains or the value of the restricted stock income. There should be some document for that. Now TIPS income, It may be a little bit more challenging. So for tips income, really the only way to document that income is just strictly with the tax return because that's going to be their total income. So then for that, you're just going to have to determine continuity of the tip income. You're going to have the tax return. That's the income they reported. There's no way to increase that over what's in the tax return. And then for tips income, what you have to determine at that point is continuity of the income. What did they report in 2022 in total income, which is going to include tips. What did they report in 2023 in total income, which is also going to include tips on the tax return. No W 2s alone wouldn't suffice because W 2s typically do not always break down the tips income. Sometimes it may only break down a portion of the tips income. You know, but not all of it. And sometimes they don't report any tips income on the W 2. Just a straight base pay that they gave the employee and everything else is up to the employee to report. So definitely we would need tax returns. So now recall here, the important point is These are solutions for documenting variable, variable income for an income that does not have a defined expiration date. So we're always going to look at the prior two years to determine averaging, and then we'll have to determine if the income is going to continue. Now we're looking at pay stubs that have OT right now and all that kind of good stuff. That's great. Maybe they'll ask the employer just to check off on the box. Is this going to continue? Yes. And if we don't have any kind of a declining trend, we're okay. And our last, slide here is solutions for documenting continuity of variable income with a defined expiration date, as opposed to no defined. expiration date. Now again, items with a defined expiration date. We're talking about pension plans, IRAs, the royalty income, restricted stock income, again, on some of those. So again, at that point, you're going to provide the document. In one side, we're just documenting the income from the document. And then on the other side, now we're documenting the continuity. Of the income to make sure that it's at least three years beyond the date of the closing because we have to document at least Three years of continuance of that income. So again, we're looking at ira 401k Royalty and any other documentation from pension plans and other, social security is, the only one that you're not going to have to show continuity because that's backed by the full, faith, interest of the United States government, but any of these other types of, retirement income, stuff like that, you're definitely going to have to get the, whatever documentation, the plan provider. can provide showing that it is going to continue for at least three years or else you're not going to be able to use the income. So I hope this helps, with, figuring out how to calculate variable income. A lot of this information you can find in the Fannie Mae, Freddie Mac, FHA, VA, and USDA selling guides, for guidance. All right. Perfect. Let's go ahead and see if there are any questions here. Okay. So Natalie has a question here. So 24 month bank statements always needed is the question. Well, that really depends on what you're trying to determine, right? This is not a bank statement loan. So if you're trying to show continuity of some certain type of income, And you cannot provide, the actual documents, definitely providing bank statements, showing the receipt of that income will, will, will help. Now, whether you need 24 months or not, depends on if you have, if you're trying to document under a one year income plan or two year income, depending on your findings, if you get a one year findings or two year findings, if it's a one year findings, you could get by with 12 months. And just a letter from a tax preparer or employer that that type of income is going to continue in the future. All right. That is the only question I see. So I guess we'll go ahead and wrap it up then. Remember, we do this every Tuesday, Wednesday, and Thursday evening at 7 p. m. Eastern, but tomorrow is Tuesday. July 4th, so we will not see you tomorrow, but we will be back next week with some new topics. Thank you everybody for tuning in and we'll see you next Tuesday at 7 p. m Eastern for the next episode of the Loan Officer Training Series with the Morgan.