In life, we are accustomed to advanced warning for changes impacting the law and/or tax codes. We often see the words "Effective January 1st" before details of the impending changes. In the mortgage industry, we often hear the words "Effective Immediately" with respect to changes (i.e. we are not given any advanced notice).
Amidst a global pandemic like COVID-19, you can reasonably expect many "effective immediately" changes to emerge. Below are the latest updates with regards to income calculation for Borrowers impacted by COVID-19. I recommend you notify any pre-approved clients of the changes to insure they will remain approved in light of these changes.
I warn you in advance, the details below are a painfully boring read, but this information provides details of the developing lending environment amidst a global pandemic. If you read between the lines below, it is obvious that Fannie/Freddie/HUD are viewing COVID-19 as an ongoing problem they anticipate will last quite some time (thus the guideline changes). In a word…UGGGH.
Fannie/Freddie updated their COVID FAQs on 7/9 stating that if the borrower has fluctuating(variable) income, a gap of employment or a reduction in income due to COVID-19, this gap cannot be excluded from the income calculation, and the year to date income must continue to be calculated over the entire time period. The agencies are stating that until the pandemic is over it’s not considered a one-time occurrence and therefore you cannot exclude the time the borrower was out of work in your income calculation.
FHA/USDA will be following this guidance as well until we get direct clarification from them. VA is the only agency that has not changed their position on income disruption due to COVID-19. VA guidelines remain in effect that if the applicant was impacted by COVID-19 (i.e. furlough, income curtailment, etc.) this should not be considered a break in employment or income(in assessing risk) provided they have returned to work in the same capacity and income levels. Please refer to VA for documentation requirements.
THIS UPDATED GUIDANCE REGARDING VARIABLE INCOME GOES INTO EFFECT IMMEDIATELY FOR ALL LOANS THAT HAVEN’T BEEN UNDERWRITTEN INCLUDING CURRENTLY IN THE SUBMISSION QUEUE.
Below are the guidelines and a couple of examples.
Borrower averages 25-30 hours a week in 2019 and in 2020 prior to COVID. They were laid off/furloughed for 2 months b/c of COVID and are now back to the 25-30 hours prior to lay off. You cannot remove those 2 months from the calculation. You are required to use the more conservative calculation of 19/20 avg or ytd avg.
Borrower works 40 hours a week/salaried. They were laid off/furloughed for 2 months b/c of COVID and are now back to working 40 hours a week/salary. You can use the 40 hours a week/salary b/c the income is not variable.
Borrower works 40 hours a week/salaried and we are using OT/Bonus/Commission. They were laid off/furloughed for 2 months b/c of COVID and are now back to working 40 hours a week/salary and receiving OT/Bonus/Commission in line with what they earned previously. You can use the 40 hours a week/salary b/c the income is not variable. For OT/Bonus/Commission, you could not remove those 2 months from the calculation. You would have to use the more conservative calculation of 19/20 avg or ytd avg.
See below for questions and answers posted in FNMA seller guide.
Q5: [NEW 07.01.20] When the income trend is declining (i.e. the borrower’s YTD income is lower than the prior year W-2 income), is it acceptable to calculate the income by averaging YTD income and income from the prior year(s)?
A: No; when the income trend is declining, the seller must use the YTD income and must not include the previous higher level unless there is documentation of a one-time occurrence (e.g., injury) that prevented the Borrower from working or earning full income for a period of time and evidence that the Borrower is back to the income amount that was previously earned. As the COVID-19 pandemic is ongoing, the income interruption/gap is not yet considered a one-time occurrence, such as an isolated injury may be.
Q6: [NEW 07.01.20] When fluctuating income is used to qualify the borrower, is it acceptable to exclude the period(s) of unpaid time due to COVID-19 (e.g., temporary layoff, furlough, reduced hours) when calculating the qualifying income?
No. For fluctuating employment earnings (e.g., fluctuating hourly employment earnings, overtime, bonus, commission, tips), and regardless of the earnings trend, all 2020 YTD income must be included in the calculation, in accordance with the requirements in Guide Section 5303.4(b) Employed income calculation guidance and requirements. As the pandemic is ongoing, the income interruption/gap is not yet considered a one-time occurrence, such as an isolated injury may be; therefore, the period of income interruption must be considered in the overall YTD calculation.