Look Out Below!

November 7th, 2012

When things drop there is usually trouble, like bombs, glassware, or your income. However, sometimes it is good when things drop, like interest rates, gas prices or your golf score. Speaking of dropping income, it is important to know that if you have any sort of variable income and it drops, it will hurt you in qualifying for a mortgage. What is variable income?

Variable income would be income streams such as overtime, bonuses, commissions, tips, self-employment income, or any other income like that that varies from year-to-year. Obviously a salaried income is not one that fluctuates like the aforementioned variable incomes. As far as qualifying for a mortgage goes, if income that varies is increasing Fannie Mae requires that we take a two-year average. If income that varies is decreasing, Fannie Mae says only the lower income is used. Below are some examples of what I mean.

John the salesperson gets commissions on top of his $60,000 base salary.
In 2011 John got $40,000 in commissions.
In 2012 John got $20,000 in commissions.
If he tries to get a loan a lender is going to use $20,000 a year in commission income to qualify him for a new mortgage.

OR:

John the salesperson gets commissions on top of his $60,000 base salary.
In 2011 John got $20,000 in commissions.
In 2012 John got $40,000 in commissions.
If he tries to get a loan a lender is going to use $30,000 a year in commission income to qualify him for a new mortgage.

So you can see the principle that I am talking about at work here. When your variable income is rising, they will take a two-year average to qualify you for a new mortgage. When your variable income is falling, they would use the lower figure as opposed to averaging it. You would think that they would average the income either way, but of course since Fannie Mae has been getting tighter and tighter, this is in line with them being stricter with qualifying guidelines.

In the old days I would average the income whether it was going up or down. It makes sense to me to average the income no matter what direction it is going in, because ultimately if you’re going to earn commissions for a decade or two, there will be ups and downs constantly. It is not fair to penalize somebody on a downcycle when they happen to be wanting a mortgage at that point in their income cycle.

So it is important to know the new rules, and that if your variable income is dropping, they will only use the recent lower figure.

Brian Martucci is a loan officer for Capital Bank Home Loans, a division of Capital Bank, N.A. He has been in the mortgage industry since 1986 and has served in a number of roles, including loan processor, loan officer, mortgage broker, branch manager, and vice president. Brian Martucci – NMLS# 185421. His opinions do not necessarily reflect the opinions and beliefs of Capital Bank Home Loans or Capital Bank. Capital Bank, N.A.- NMLS# 401599. Click here for the Capital Bank, N.A. “Privacy Policy”.​

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