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Do you have stable income???

August 20th, 2012

This week’s topic:                  Do you have stable income ???
 
 
One of the today’s lending hot buttons is income stability.
Previously, source & amount of income was the basis of qualifying.
If your present income was sufficient, you were good !
Mortgage lenders today pay close attention to the continuity & stability of income.
Loans routinely get denied for income not being stable.
 
What is stable income ???
Any income used for mortgage loan qualification must be “stable”.
This applies whether one is employed or self-employed.
It applies when income is from non-employment (interest, dividends, rental income, etc..).
No matter what the source of the income is, it must be stable or consistent.
 
All income can be categorized as predictable and less predictable.
Predictable income has a reliable & consistent flow, like base salary or hourly pay.
Income that varies is less predictable, alike overtime, commissions, bonus or self-employment.
When income is variable, lenders average it for 2 years to stabilize it.
 
The primary criteria of stable income is the “income trend”.
Imagine if you created a chart of your earnings history for two years.
If the arrow is straight across, the trend is consistent, equal or stable.
If the arrow is up, the trend is increasing.
If the arrow points downward, the income trend is decreasing.
 
When declining income exists, it’s a big mortgage lending problem.
If the trend is declining, income is not considered stable.
It isn’t good enough to have sufficient income to qualify.
The income stream must be stable or increasing, and not declining.  
 
Bonuses, commission and overtime varies year by year.
Self-employed people have better and worse business years.
The key for mortgage lenders is to prove income isn’t declining.
Think about that chart, and how to keep that arrow from going down ? 
 
Adding another year to our analysis is the easiest way to solve the problem.
Here’s a sample case study: 
 
Borrower 2011 income: $100,000
Borrower 2010 income: $150,000
 
This income illustrates an arrow pointing down, as 2011 was much less than 2010.
Now, let’s add another year to the mix for 2009.
 
Borrower 2009 income: $ 90,000
 
Now the picture is totally different, as income arrow zigzags, and isn’t downward.
2010 was an excellent year, and 2009 & 2011 are much in line and consistent.
 
If income was really declining with no solution, it wouldn’t be usable for qualifying.
If you encounter this on a transaction, make sure your lender is problem solving.
 
It takes a lender that can think outside the box to be creative.
Adding the extra year here made the difference between loan approval and denial.
This makes it sound easy, when usually it isn’t.
Having a professional experienced lending partner will help you navigate this !

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