Lender Guidelines: Appendix- Income Guidelines for Borrowers Receiving Bond DPA or MCC
Lender Guidelines: Appendix- Income Guidelines for Borrowers Receiving Bond DPA or MCC
These income guidelines apply to borrower(s) receiving: (1) Bond DPA or (2) an MCC (with Non-Bond DPA). These guidelines are required under Section 143 of the Internal Revenue Code and related regulations and rulings. Lenders and borrowers must meet these guidelines in order to receive the benefits of Bond DPA or an MCC.
TSAHC is relying on the lenders and borrowers to provide correct information on income. This reliance is based upon lender certifications following a reasonable investigation of the borrower’s income sources and the borrowers review, completion and execution of the applicable Program Affidavit.
In the event of false statements or fraud, substantial penalties may be levied. Therefore, TSAHC requires the Lenders and the borrowers to provide accurate income-related information to ensure that calculations are within the limits.
FOR BOND DPA AND MCC INCOME COMPLIANCE PURPOSES ALL SOURCES OF INCOME MUST BE INCLUDED, WHETHER OR NOT USED TO QUALIFY BORROWERS UNDER STANDARD UNDERWRITING GUIDELINES. Under no circumstances will the income used to determine qualification for Bond DPA or an MCC be less than that used by the Lender when qualifying borrowers for repayment of their mortgage loan.
In the case of complicated calculations, Lenders should contact TSAHC to ensure that calculations meet the applicable rules.
For purposes of determining income, the gross “family income” of the borrower(s) must be determined. The income of the following persons must be considered:
1. Any mortgagor and any co-mortgagor listed on the mortgage (deed of trust).
2. Any other person who is “secondarily liable” on the mortgage (deed of trust) and who is expected to live in the residence.
Therefore, the income of any person listed on the deed of trust must be included, regardless of occupancy.
For a married couple, the total gross income of both persons must be counted, even if a spouse is not listed on the title to the residence.
In Texas, a co-signer or guarantor executes only the mortgage note, so that such person’s income does not need to be included if such person is not an occupant. This includes a spouse that is a non-occupant of the residence.
Gross income is not reduced by the amount of child support payment a husband/wife makes for the care of a child or children. However, a husband/wife who receives child support payments must include this amount in gross income.
Net rental income is to be included in the gross income calculation.
With regard to income in addition to base salary, if the mortgagor has earned income during the current period (meaning the period beginning 12 months prior to the loan application and ending on the loan closing date) and has a history of such income, then that income will be included in income.
Base pay is calculated based on current income. (i.e., if someone earning a salary has received or will receive a raise in the current period, the increased income should be used and not a year-to-date average.)
When calculating additional or other income to include in gross income, it is important to calculate the income on a pro-rata, monthly basis. This will assist in calculating the income accurately.
Information with respect to current gross monthly income may be obtained from available loan documents which include but are not limited to paycheck stubs and loan applications.
1. Gross Income Shall Be Determined Without Deductions for the Following:
- Funds paid into a tax-sheltered retirement account.
- Child support payments made by a borrower for the benefit of the borrower’s child or children.
- Alimony, separate maintenance, or similar periodic payments that any borrower is required to make to a spouse or former spouse.
- Unreimbursed employee business expenses.
2. Gross Income Shall Include, but Not be Limited to, All of the Following:
a. The gross amount, before payroll deductions, of wage and salaries, overtime pay, commissions, fees, tips, bonuses, gambling winnings and prizes (even if a one-time occurrence), and other compensation for personal services.
Overtime
Income earned from overtime will be included if the borrower has a history of such income or the income was earned during the current period. Even if overtime is not used in calculating ratios, it is always included in income.
Bonus
The gross amount of bonus earnings before any payroll deductions is to be included in the income calculation.
Bonus Income. The bonus is to be included in the income if:
1. The bonus is part of a collective bargaining agreement and must be paid; or
2. The bonus is included in the computation of income by the employer or if there is a history of bonuses.
If there is a history of bonuses but the borrower does not know if a bonus is planned, nor does the employer divulge its plans for a bonus nor the projected bonus amount, the Lender is to use an average of the past two years’ bonuses to calculate income.
The bonus is not to be included in the Income if:
1. The bonus is totally discretionary by the employer and there is no previous bonus history; and
2. The borrowers cannot anticipate with certainty whether such bonus may be received in the future.
Seasonal/Part-Time/Temporary Income
Include part-time or seasonal employment in calculating income. For example, if the borrower worked for three months during the summer and earned an average of $3,600 during each of the past two years, then divide the $3,600 by 12 months which equals $300 per month. Add the $300 per month to the gross monthly income. Multiply by 12 to determine the income.
Include short-term, part-time or seasonal employment in calculating income if the mortgagor earned this in the last twelve months. For example, if the mortgagor earned $1,000 during the application period by painting the mortgagor’s parents’ house, include this income.
b. The net income from an operation of business or profession or from the rental of real personal property. For this purpose, if this operation results in a loss, the loss may not be used to offset income generated from other sources. For this purpose, any shareholder that owns 10 percent or more of any outstanding class of stock in a corporation shall also be deemed to have received income in its proportionate share of net earnings not otherwise distributed in salaries or dividends.
c. All dividends and interest, including otherwise tax-exempt interest. Interest earnings from IRAs, VIPs and 401(k)s need not be included.
d. The full amount of the periodic payments received from Social Security, housing assistance payments, annuities, insurance policies, retirement funds, pensions, disability or death benefits, and other similar types of periodic receipts including any lump sum payment for the delayed start of a periodic payment.
e. Payments in lieu of earnings, such as unemployment and disability compensation, workers’ compensation, and severance pay.
f. The full amount of public assistance payments.
g. Periodic and determinable allowances, such as alimony and separate maintenance payments received, housing allowances received, and regular contributions or gifts received from persons not residing in the dwelling, where such sums are received on a current basis and which may be reasonably expected to continue.
h. The distributive share of partnership income.
i. Child support payments received by a borrower for the benefit of the borrower’s child or children.
j. All regular pay, special pay and allowances of a member of the Armed Forces (whether or not living in the dwelling) who is the head of the household, spouse, or other person whose dependents are residing in the unit.
k. Education Grants: the portion of the income from grants that is used for living expenses is to be added to the income.
l. Car Allowance: income received from employers for car allowance must be included in the income calculation if the borrower has no accounting responsibility to their company. Example: If the borrower receives $300 per month from his employer for car allowance and is not required to file a mileage/expense report monthly, then this income must be included in the income calculation.
m. Capital Gains/Losses: both the taxable and non-taxable portions of capital gains are to be included as income if a history of these incomes exists. If the two-year average results in a gain, then it must be added to gross monthly income, and losses are to be disregarded (losses cannot be used to reduce gross monthly income).
n. Rental Property (not subject property):Net rental income currently being received is to be used to calculate income; borrowers must provide leases and applicable tax forms.
3. Gross Income Does Not Include:
a. Casual, sporadic or irregular gifts.
b. Amounts which are specifically for, or in reimbursement of, medical expenses.
c. Lump sum additions to family assets, such as inheritances, re-enlistment bonuses, insurance payments (including payments under health and accident insurance and workers’ compensation), capital gains and settlement for personal property losses. If the income is received in any form other than lump sum (i.e., monthly or annual), then it must be treated as permanent income and added to the income calculation.
d. Amounts of educational scholarships paid directly to the student or the educational institution, and the amount paid by the government to a veteran for use in meeting the cost of tuition, fees, books, and equipment.
e. Special pay to a family member in the Armed Forces who is away from home and exposed to hostile fire.
f. Relocation payments under Title II of the Uniform Relocation Assistance and Real Property Acquisition Policies Act of 1970.
g. Foster child care payments.
h. The value of coupon allotments for the purchase of food pursuant to the Food Stamp Act of 1977, 7 U.S.C. Section 2011 and 2027, which is in excess of the amount charged the eligible household.
i. Payments to volunteers under the Domestic Volunteer Service Act of 1973.
j. Payments of allowances made under the Department of Health and Human Services’ Low-Income Home Energy Assistance Program.
k. Payments received from Job Training Partnership Act.
l. Income from employment of children (including foster children) under the age of 18 years of age and under unless executing the Deed of Trust.
m. Income from caring for one or more foster children.
Military Pay
For purposes of computing the borrower’s gross monthly income regarding military pay, the monthly income is the “total entitlement” shown on the borrower’s most recent monthly Leave andEarnings Statement. Non-taxed income, such as a housing allowance, iscounted as income. Certain categories of pay, which may be revised only sporadically, may need to be considered on a case-by-case basis.
Self-Employed
The Lenders should watch for all types of self-employment (i.e., 1099 income received from employer run through Schedule C, Form 2106, etc.).
The procedure to calculate income for self-employed borrowers is the same as under the respective underwriting guidelines.
As in standard underwriting, depreciation, depletion and self-employment tax are to be “added back” to determine annual income. Tax returns and a self-employed YTD Profit and Loss are required for all self-employed borrowers.
EXAMPLES OF INCOME
The following examples are based upon standard credit underwriting guidelines. These examples also illustrate the underwriting for MCC or Bond Loan compliance and are not substantially different from your standard procedures. Please note that income earned in a manner as illustrated by these examples must be included in the income calculation.
Example: Permanent Seasonal Income
Include part-time or seasonal employment in calculating income if borrower works every summer. If borrower worked for 3 months and earned an average of $3,600 during each of the past two years, then divide the $3,600 by 12 months which equals $300 per month. Add the $300 per month to the gross monthly income. Multiply by 12 to determine the income.
Example: Seasonal/Temporary Income
Include short-term, part-term or seasonal employment in calculating income. If the borrower earned $1,000 during the application period by painting the borrower’s parents’ house (unless the borrower is a painter either part-time or full-time), the $1,000 must be counted as income. This is calculated by dividing the $1,000 by 12 or $83.33 per month. This amount of $83.33 is added to gross monthly income. Multiply by 12 to determine the income.
Example: Overtime and Bonus
When calculating other income, the first thing that needs to be determined is base income. The base income is then multiplied by the number of months that has been covered by the most current pay stub. This calculation will give the year-to-date base income or the amount of income that would have been earned if compensation of another kind had not occurred. After having established a year-to-date base, subtract it from the year-to-date total gross income on the pay stub. The difference will be the year-to-date total of other income.
The next step is to determine the other income earned in the months missing from the 12-month period. (If the pay stub covered eight months, four months is still needed.) This is done by taking the current annual base and subtracting it from the W-2 from the previous year. This is the other income earned for the previous year. Divide this number by twelve and multiply by the number of months needed to complete the 12-month period.
Once a year-to-date total of other income from the pay stub and other income from the previous year are established, combine the two totals to get all other income earned in the previous 12 months.
Closing Date: April 27, 2018
Pay Stub Dated: March 15, 2018 (2.5 months)
Year-to-Date Gross: $4,625
Base Income: $1,800 (monthly)
W-2: $22,500 (9.5 months of other income will be taken from this.)
Year-to-Date Base Year-to-Date Other
$1,800 x 2.5 = $4,500 $4,625 - $4,500 = $125
Other Income From Previous Year
$22,500 – ($1,800 x 12) = ($900/12) x 9.5 = $712.50
Total Other Income, i.e. Overtime, Bonus
$125 + $712.50 = $837.50*
*To be added to the current base income to determine total annual income.
Omission of Other Income, i.e. Overtime, Bonus
Omitting other income that has been earned in the last twelve months is only allowed if at least two of the items listed below are provided:
- At least two pay stubs showing compensation for base income only.
- A letter from the employer (on company letterhead) stating that compensation for overtime and bonus will not occur in the future.
- Documentation that employment status has changed from non-exempt to exempt.
For access to the full TSAHC DPA & MCC Guidelines, please click here.