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Income Required to be Included for HomeReady® & Home Possible®
Question:
Are lenders required to use all income shown on paystubs, such as bonus and overtime income, when qualifying a borrower for HomeReady® or Home Possible®? Or do we have to calculate their yearly income with the borrower’s base qualifying income shown on the 1008?
Answer:
Both Fannie Mae and Freddie Mac state that a lender only has to consider the income used in determining the borrower’s ability to repay. This basically means that an entire income type may be excluded, but it cannot be reduced to make the AMI limits ‘work.’
Fannie Mae
Borrower Income Limits and Calculations
In determining whether a mortgage is eligible under the borrower’s income limits, the lender must count the income of all borrowers who will sign the note to the extent that the income is considered in evaluating the loan’s creditworthiness.
Example of how this might apply to your scenario:
Base pay = $68,000/year = must use the entire base pay or $5,667/mo.
Overtime pay = $12,500/year = must exclude the entire amount and cannot use some average or reduction that would make the loan work in the AMI.
Freddie Mac
For a further example of the acceptability of this approach, consider this FAQ for Freddie Mac. Home Possible FAQs.
No, you need to verify only a borrower’s qualifying income. For example, if the borrower can qualify for the mortgage with their base pay and not their overtime income, you may use only the base pay to determine Home Possible eligibility.
Take a brief Home Possible® Income Eligibility tutorial on income requirements for Home Possible mortgages for more information.