If the borrower’s CPA is willing to address the
reason for declining income and potential for turnaround, this may be helpful in decisioning. Not all
CPAs are involved in the operations of the business;
their expertise may be restricted to income tax filing.
However, a hands-on CPA can provide an impartial
opinion or increase concern if that statement appears
to be hedged.
Sympathy for the borrower is poor rationale for
Fluctuating income should be distinguished from
declining income. It occurs in various lines of work.
Examples are attorneys who handle major cases,
developers with longer-term projects, and those in
the entertainment industry. Options for supporting
documentation are a chronological project list, a written explanation from the CPA, and/or additional tax
returns. Signed contracts for upcoming projects can
also support the pattern.
The most justifiable method of handling fluctuating
income is documenting a recurring pattern, e.g., alternating higher- and lower-earning years or two lower
years followed by a higher year, and then averaging
Traditional examples of projected income were
a beginning stockbroker with no history of commissioned earnings or an employee with less than a
two-year history of performance-based bonus income.
Projected income has since expanded to a newly-hired academic before the school year begins or a
recent retiree beginning to receive pension and social
The traditional examples remain unacceptable.
The expanded examples demonstrate the limitations
of the one-size-fits-all philosophy. Projected income
can now encompass a spectrum ranging from speculative to assured. To qualify the newly hired academic,
a signed employment contract should be adequate
even if a verbal VOE or pay-stub is not available prior
to closing. Educators legitimately prefer to relocate
before the academic year begins. To qualify the new
retiree, award letters or the equivalent are needed.
For both examples, the dollar amount of qualifying
income is not speculative.
The greater risk for academics is not in the initial
months of teaching but several years after if tenure is
not granted. The greater risk for newly retired borrowers is inability to adjust to reduced income, more so if
savings do not bridge the gap. If the industry is willing
to accept the greater risks, it should reconsider the
expanded definition of projected income.
Anne Elliott studied mortgage risk throughout her
professional career. Her upcoming book, Underwriting
with Thought, or An Alternative Approach to Responsible
Origination, will be published in early 2017.
Contact her at email@example.com