Why Haven’t Loan Officers Been Told These Facts?

Short-term Income for Liability Offsets

An applicant’s income, or income stability, can be challenging to ascertain. Generally, for purposes of ratio or residual assessment, income documentation must support the continuance of the income for at least three years from the application date. Some notable documentary exceptions include social security disability income. From the 4000.1: Disability Benefits are benefits received from the Social Security Administration (SSA), Department of Veterans Affairs (VA), other public agencies, or a private disability insurance provider. If the Notice of Award or equivalent document does not have a defined expiration date, the Mortgagee may consider the income effective and reasonably likely to continue. The Mortgagee may not rely upon a pending or current re-evaluation of medical eligibility for benefit payments as evidence that the benefit payment is not reasonably likely to continue.

FNMA Exclusions From the Three-Year Continuity of Income Rule

The lender does not need to document 3–year continuance:

  • automobile allowance
  • base salary
  • bonus, overtime, commission, or tip income
  • capital gains income
  • corporate retirement or pension
  • disability income — long-term
  • foster-care income
  • interest and dividend income (unless other evidence that asset will be depleted)
  • military income
  • mortgage credit certificates
  • part-time job, second job, or seasonal income
  • performance-based restricted stock units or restricted stock income
  • rental income
  • self-employment income
  • Social Security, VA, or other government retirement or annuity
  • time-based restricted stock units or restricted stock income when awarded in multiple consecutive years

FNMA Three-Year Continuity of Income Rule

The lender must document 3–year’s continuance:

  • alimony, child support, or separate maintenance
  • distributions from a retirement account – for example, 401(k), IRA, SEP, Keogh
  • mortgage differential payments
  • notes receivable
  • public assistance (not including Section 8 Housing Choice Voucher Homeownership payments)
  • royalty payment income
  • Social Security (not including retirement or long-term disability)
  • time-based restricted stock units or restricted stock income when receipt was a one-time event
  • VA benefits (not including retirement or long-term disability)

However, how should lenders consider income that must meet the three-year continuity rule but is available for a duration of less than three years? If the income is clearly scheduled to terminate within three years of application, is this short-term income of no account? There are myriad instances where one encounters this situation, including promissory notes, court orders, and lottery winnings, which usually have defined ending dates.

For income subject to the continuity test, lenders must exclude income from the effective income if such income has a defined termination date within three years of application. However, this general requirement does not preclude the lender from considering short-term income that fails the continuity test when determining the applicant’s repayment capacity, including residual and ratio calculations. For example, in cases when the duration of short-term income exceeds the payment duration of specific liabilities, the lender should consider the offset effect.

Should a lender consider short-term income relative to short-term liabilities? In some cases, income with a duration of less than three years from application that otherwise must meet a three-year continuance test might be considered in the capacity test. Generally, lenders should always leverage the offset when justifying high-DTI/low-residual credit approvals.

Liability Offsets for High DTI/Low Residual Loans

An offset occurs when the lender identifies stable income with a duration of less than three years from the application but exceeding the duration of specific applicant liabilities such as car loans, child support, or alimony.

For example, assume the applicant is the owner of a promissory note paying $3000 monthly. The final note payment occurs 30 months after the application date. The applicant has a monthly alimony payment of $2000 that terminates in 22 months. Alimony in the capacity calculus can be tricky. Generally, alimony should be deducted from the applicant’s stable monthly gross income, as opposed to adding the alimony as a liability. Deducting the alimony from income has a lesser impact on the applicant’s capacity than adding the liability as a debt. Yet what is even better is excluding the alimony from the capacity calculus altogether by offset. In the case of an offset, the lender neither reduces income nor increases debt.

Lender, investor, and guarantor policies differ regarding the use of offsets. Do your homework before pushing the boundaries with liability offsets. Income offsets are most appropriate for transactions with ample reserves, strong credit, and little or no risk layering.

VA Pamphlet 26-7, Revised Chapter 4: Credit Underwriting

r. Other Types of Income
“While not all types of income can be listed, documentation of income must support the history of receipt and the likelihood or continuance of the income for at least 3 years from the anticipated closing date to include in effective income. Otherwise, consider whether it is reasonable to use the income to offset short term obligations of 6 to 24 months duration.“

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BEHIND THE SCENES-HUD Housing Counseling Certification Now Available In Spanish, Traditional Chinese, Korean, and Vietnamese.

FOR RELEASE
Monday
July 22, 2024

WASHINGTON – The U.S. Department of Housing and Urban Development (HUD) announced today the availability of a newly updated certification exam for housing counselors. In addition to content updates, the exam and associated training materials are now available in Spanish, Traditional Chinese, Korean, and Vietnamese. The announcement was made last week by Deputy Assistant Secretary for the Office of Housing Counseling David Berenbaum at the UNIDOS US Annual Conference Latino Homeownership Meeting in Las Vegas, NV.

“Throughout our programs, we continue to work to remove barriers to purchasing or renting a home. We want the HUD certification process to support housing counselors who can capably assist a diverse range of client populations and languages,” said Assistant Secretary for Housing Julia Gordon.

All counselors must pass the HUD certification exam, which ensures that consumers receive accurate, relevant, and quality housing counseling services. Updates to the exam include new questions that incorporate counseling scenarios that are relevant to current client needs, refreshed training and practice exam questions, and a newly updated Housing Counseling Certification Exam website where counselors can find both the certification exam and HUD’s Home Equity Conversion Mortgage counselor exam.

HUD-certified housing counselors provide a range of services, including financial and homebuyer education, foreclosure and eviction prevention counseling, disaster relief and recovery counseling, and more. There are over 4,300 HUD-certified housing counselors and more than 1,480 HUD-approved housing counseling agencies currently serving more than one million clients each year.

“With our updated exam and new availability in multiple languages, we are continuing to ensure that the vital role of HUD-certified housing counselors is relevant and accessible to all,” said Deputy Assistant Secretary David Berenbaum. “Including in-language resources for counselors who work with clients whose preferred language is not English enables culturally sensitive and linguistically appropriate counseling.”

To find a HUD-approved housing counseling agency, visit our online search tool at hud.gov/findacounselor, or call our toll-free line at 800-569-4287 (202-708-1455 TTY).

 

 

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