One of the biggest challenges for the mortgage industry during the COVID-19 pandemic is keeping track of all the GSE policy and guideline changes. One of the most impacted parts of the mortgage process is the income calculation, a process that can already be tricky.
That’s why we’ve compiled our top 6 tips to calculating income during COVID-19 to help you through the changes.
#1) Compare current base pay with YTD and prior years
To accurately compare the current base pay with prior years, look at past years’ W-2s or WVOEs. As part of your base pay comparison, you’ll want to note possible pay reductions that could occur, confirm that the borrower’s income level noted on the application will likely continue in the future, and address any inconsistencies.
If you do need to explain any inconsistencies, ask your borrower to provide a written explanation to address their lower YTD earnings. Also, remember that COVID-19 is NOT being considered a one-time occurrence.
#2) COVID-19-related furloughs or unemployment cannot use unemployment benefits
A key fact to keep in mind is that a borrower on furlough or unemployment due to COVID-19 cannot use unemployment benefits under the Temporary Leave Income or Other Income Policies. The unemployed benefits covered under these policies can only be used for seasonal employees where it is reported on signed federal tax returns and the employment will likely continue.
Note that borrowers must have returned to employed status for their income to qualify if they were furloughed or laid off as a result of COVID-19.
#3) Exercise caution around variable income and fluctuating hourly workers
With COVID-19, many hourly workers have seen their rate and/or hours cut. During your review process, compare the prior year’s earnings to YTD earnings to see if they match up, as well as hours worked YTD versus last year.
A helpful tip to keep in mind is if YTD earnings are lower than a borrower’s historical earnings and YTD are confirmed to be stable, you should use the lower YTD earnings – do not take the average historical earnings in this case.
#4) Check age of documents
A policy that’s been implemented by both Fannie Mae and Freddie Mac is that income documents must be dated within 60 days of the note date. If you receive income verification from a third-party verification vendor, check that the vendor’s database is providing statements no more than 60 days old as of the note date.
#5) Use these COVID-19 guidelines if borrower is self-employed
With the persistence of COVID-19, the GSEs have implemented certain guidelines for self-employed borrowers below:
- P&L statements must be dated within 60 days of note date – should include business revenue, expenses, and net income.
- Secure verification that the business is open and operational within 20 days of the note date or prior to loan delivery
- The lender must determine to what extent a business has been impacted by COVID-19
- Any proceeds from a PPP or other COVID-related loan or grant cannot be used to support self-employed income for qualifying purposes
Also remember that proceeds from a PPP loan cannot be used toward cash to close or reserves.
#6) Know where to get more resources
One thing that helps through all these changes is approaching everything with a learning mindset. Always be on the lookout for new information and resources, as well as creating a culture within your team to share examples and scenarios of calculating income.
You should also consider using a pre-funding audit for training opportunities for your team and review those weekly. You can also look for printable resources such as our flier to give a visual reminder of best practices.
In addition to this video and blog post, there are some other resources available for you on our website, including several loan scenarios and a mini module on how to review a pay stub. Get those resources here.