- Determine the borrower's sources of income to help evaluate their ability to re-pay the loan.
- Salary Income, Commissions, Bonuses/Secondary Incomes, Investments, Self-Employment
- Social Security, Pension, Annuities, Miscellaneous Income
- Employment Stability, Probability of Continuation, Monthly Base Income, Monthly Secondary Income, Overtime and Part Time Income, Commission Derived Income, Trade Income, Teacher's Income
- Fixed Incomes from Social Security
- Trust, Inheritance, Alimony/Child Support, Military Income, Recently Graduated Borrower, Tips/Gratuites/Cash, Foster Parent Income
- Calculation of Rental Income of New Properties
Lesson Excerpt
Most Americans derive the majority of their income from their employer. The pay-stub and form W-2 showing year end employment income are the most identifiable and important forms of income documentation. From the pay stub and the application, the Loan Officer and Underwriters will determine the pay structure of the applicant, as well as the stability of their employment.
As a borrowers income becomes more complex, so does the documentation needed to verify it. Keeping this in mind, you will then turn to the next most common source of income documentation, the 1040s U.S. Individual Income Tax Return. This form is the most verifiable and complete repository of personal income information within the United States. On the average, two years worth of signed copies will be obtained and reviewed for most borrowers.
Once a business has grown beyond the boundaries of a sole-proprietorship, life gets a little more complicated for the business owner. For reasons of tax-limitations and legal liability, entrepreneurs file to become partnerships, corporations or s-corporations, and must file new tax reporting documents accordingly.
For all partnerships where an applicant owns more than 25 percent ownership, the Loan Officer will request two years worth of 1065 U.S. Partnership Income Tax Returns for all general partners. The similar return for s-corporations is called the 1120S. For both, if the applicant owns less than 25% of the company, then the entire return does not have to be sent, but merely the K-1 form from that business entity. Applicants who own more than 50% of a corporation must send in the last two years of the corporations tax returns.
Most lending institutions will evaluate all three business types similarly. The tax returns are analyzed to determine the income or losses being generated. The bottom line activities are adjusted according to the consistency of activities within the business over the two years being considered. These figures are then added to or subtracted from the applicants overall income picture.
