The lender must establish the borrower’s earnings trend from the prior two years using tax returns.

Stable or increasing annual earnings are acceptable.

Businesses showing a significant decline in income are not acceptable, even if the current income and ratios meet FHA guidelines.

If the borrower’s earnings trend for the previous two years is downward and the most recent tax return or P&L is less than the prior year’s tax return, the borrower’s most recent year’s tax return or P&L must be used to calculate income.

Income from a business with a greater than 20% decline in income over the analysis period is not acceptable.

If there has been a 20% or greater decline, the income is still deemed stable if:

• The reduction was the result of documented extenuating circumstances.
• The income has been stable or increasing for at least 12 months, and
• The borrower qualifies using the reduced income.

• Transcripts of training and education demonstrating qualification for the new position, or
• Employment documentation evidencing continual increases in income and/or benefits.

• Most recent pay stub that shows the borrower’s year-to-date earnings.
• Most recent paystubs covering 30 days.

General rule – Overtime or bonus income must have been received for the past 2 years.

Exception – Periods of less than 2 years may be acceptable if the lender can justify and document in writing why its use is acceptable.

How to calculate the income:

• Average over 2 years.
• Average over more than 2 years if the income varies significantly from year to year.

General rule – Overtime or bonus income must have been received for the past 2 years.

Exception – Periods between 1 and 2 years may be acceptable if consistently earned for at least 1 year and likely to continue.

How to calculate the income:

• Average over 2 years.
• If the income from the current year decreases by 20% or more from the prior year, use the current year’s income.

Earned for 1-2 years okay if likely to continue.

Earned less than 1 year okay if:

• Pay change from salary to commission for similar position with same employer or
• Borrower would qualify if commission income was not used.

Calculate using 2-year average:

• If income has decreased, compensating factors are required.

Earned for at least 1 year in same or similar line of work and likely to continue.

Calculate by subtracting unreimbursed business expenses from the lessor of:

• The average net commission earned over the past 2 years (or however long it’s been earned) and
• The average income earned over the prior 1 year.