Income & Employment Verification Flashcards

A borrower recently transitioned from a W-2 employee to self-employed in the same industry. After how many years of self-employment tax returns is the income generally acceptable under agency guidelines?

Answer: Two years of self-employment tax returns

Standard agency guidelines require two years of self-employment income history, typically documented through two years of personal and business tax returns.

Which of the following is the MOST reliable method to verify the existence and stability of a self-employed borrower's business?

Answer: A business license, CPA letter, or listing in a recognized directory such as 411.com

Lenders verify self-employment by requiring third-party confirmation such as a business license, CPA letter, or directory listing to confirm the business is active.

When calculating qualifying income from a partnership (Schedule E, Part II), the underwriter includes the borrower's share of:

Answer: Ordinary income plus depreciation, depletion, and amortization add-backs

For partnership income, the underwriter uses the borrower's proportionate share of ordinary income and adds back non-cash deductions like depreciation, depletion, and amortization.

A borrower's income declined significantly from Year 1 to Year 2 of self-employment. Which approach should the underwriter take?

Answer: Use Year 2 income only, since it is the most current

When self-employment income shows a declining trend, underwriters should use the lower current-year income to represent the borrower's actual earning capacity.

Which of the following scenarios represents an unacceptable employment gap that would likely affect income qualification?

Answer: A borrower left employment 30 days ago and has not yet started a new position

A borrower who is currently unemployed with no confirmed start date for new employment cannot have that anticipated income used for qualification.

An underwriter receives two pay stubs showing consistent income, but the 4506-C tax transcript reflects significantly lower income than what was stated on the application. What is the underwriter's required action?

Answer: Investigate the discrepancy and resolve it before approving the loan

Any discrepancy between stated income and IRS transcript income must be resolved; the loan cannot proceed until the inconsistency is adequately explained.

Social Security income for a non-retired borrower (e.g., disability) is grossed up by a factor of 125% when it is:

Answer: Non-taxable, based on the borrower's tax return showing no tax owed on the income

Non-taxable income such as Social Security disability can be grossed up by up to 125% because the borrower receives it tax-free, giving it greater purchasing power.