- Evaluating Employment History
Stability
Any income to be considered in the Loan qualification analysis must be stable, regular and recurring, with evidence that a high probability exists for continued receipt at current or increasing levels for at least three years.
Employment should be stable, with at least a two year history in the same job or in a similar job or jobs. If a borrower has recently switched jobs (even if in the same line of work) they must be on their current job for at least 90 days in order to be eligible for financing. For bonus, commission, overtime or tip income, the Borrower must evidence at least a 24 month history of receipt of this type of variable income, as well as be on their current job:
- at least 24 months if > 50% of their income is variable (although all 24 months don’t have to show > 50% variable compensation), or
- at least 6 months if < = 50% of their income is variable,
in order to count this variable income component. In making the determination of whether a borrower falls into the >50% category, AmMAC uses the current YTD period if there are >= 90 days in that period, or if not, then we use the prior year (CY-1) period to make this assessment.
Income Continuity
Verification of income continuity depends on the type of income. For income without a defined expiration date, unless we have knowledge to the contrary (e.g. an employer statement in the VOE that employment has been or is about to be terminated or suspended, or other similar indication that current employment is not stable), we rely on our verification of past historical receipt of the income as proof that it will continue for at least three years.
For income that does have a defined expiration date, or depends on a depleting asset, or is otherwise limited in scope, specific documentation is required to prove continuance for at least three years from the date of application.
The following table contains examples of income types with and without defined expiration dates.
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Expiration Date Not Defined |
Defined Expiration Date |
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Does NOT need specific documentation of 3–year continuance:
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DOES need specific documentation of 3-year continuance:
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Job Changes
A Borrower who changes jobs frequently to advance within the same line of work should receive favorable treatment if this can be verified. Frequent job changes without advancement or in different fields of work should be carefully reviewed to ensure consistent or increasing income levels and likelihood of continued stable employment.
Employment Gaps
The Borrower must provide a detailed two year employment history, all of which must be verified by AmMAC (see Verification of Employment & Income). Obtain a written explanation from the Borrower for any job gaps that exceed 30 days within the most recent 2 years. Borrowers with an extended gap (> 180 days) within the past 2 years, are not eligible for financing with AmMAC.
Request for Tax Returns from IRS (Form 4506-T)
Each Borrower(s) must execute an IRS Form 4506-T at time of loan application and at loan closing for all loans. IRS Form 4506-T authorizes AmMAC to request copies of the tax returns from the IRS as needed to fulfill quality control and audit requirements.
Verbal Verification of Employment
See Verbal VOE’s for verbal verification of employment requirements.
Top of Form
- Income Analysis
Stable monthly income is defined as the Borrower's gross monthly income from the primary job, plus specific stable secondary monthly income. Any income included for qualification purposes must be verifiable by either tax returns, and/or bank statements in order to be considered.
Unreimbursed Business Expenses
If the borrower’s tax returns reflect unreimbursed business expenses, the 2 year average of those expenses must be deducted from qualifying income, regardless of whether the borrower is straight salary, salary + bonus, etc.
Salaried Income
A salaried worker is paid on a regular, recurring basis by an employer. Income is reported to the IRS on a W-2 form. The Borrower has less than 25% (or no) interest in the business. If the borrower’s title in their salaried job is: President, CEO, COO, or CFO, AND the company is not a publicly traded corporation, then a letter from their tax preparer will be required, verifying that they do not own 25% or more of the company that is paying them their salary. This written verification will also be verbally verified by AmMAC.
Salaried income is verified with the following:
- Current pay stub(s) plus the last 2 Year-End paystubs in the case of borrowers with Bonus, Commission, Tip, Weekend Differential, and/or Overtime income (if a written VOE(s) can be obtained that verifies the amount of Bonus, Commission, Tip, Weekend Differential, and/or Overtime income for the last two (2) full years, then the last 2 Year-End paystubs are not required).
- The most recent two years federal tax returns.
- Third party verification of employment/income and/or bank statements verification of income receipt.
- Verbal verification of employment just prior to funding.
See Verification of Employment and Income for specific requirements.
For borrowers whose income is straight salary (no bonus, commission, overtime or tip income), the income used to qualify them will be that reflected on their current paystubs and verified via their bank statements, provided they have met the minimum time on job requirements. Conversion of YTD salary from paystubs to an estimated monthly salary depends on the pay schedule the borrower is on. See the table below for details:
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Pay Period Frequency |
YTD to Gross Monthly Conversion – Normal |
YTD to Gross Monthly Conversion – Teacher on 10 Month Pay Cycle |
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Monthly or Twice Monthly |
YTD Salary/[(#Days from Beginning of Year to Pay Period End Date)/30] |
YTD Salary/[(#Days from Beginning of Year to Pay Period End Date)/30]*10/12 |
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Weekly or Every 2 Weeks |
(YTD Salary/[(#Days from Beginning of Year to Pay Period End Date)/7, rounded down to the nearest whole #])*52/12 |
(YTD Salary/[(#Days from Beginning of Year to Pay Period End Date)/7, rounded down to the nearest whole #])*3.6111111 |
Overtime, Bonus, Commission or Tip Income
May be verified by Standard Documentation provided all of the following are met:
- Income can be verified as having been received for at least two years.
- The last 2 year-end paystubs OR VOI results, are required to document the amount of overtime, weekend differential, bonus, commission and/or tip income received in each of the preceding 2 years.
- The last years federal tax returns to verify unreimbursed expenses incurred, if any.
The base salary portion of income is determined the same as above for a Salaried Income borrower. The appropriate calculation of their bonus, commission, overtime, weekend differential, and/or tip income to use will depend on whether the documented trend in that income is stable, increasing or decreasing. The table below documents AmMAC policy in each of these cases. For purposes of evaluating the trend in variable compensation, all variable components (bonus, commission, overtime, weekend differential, and/or tip income) are combined into a single variable income component, that is trended for the table below.
CY = Current Year (i.e. year of application)
CY-1 = Year preceding the application year
CY-2 = 2 years prior to the application year
We will only include CY in the evaluation of qualifying bonus, commission, overtime, weekend differential, and/or tip income if there are at least 90 days of YTD history on the Borrower’s paystubs.
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CY-2 |
CY-1 |
CY - YTD |
Decision |
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Base Yr. |
Higher |
< 90 days in YTD period |
Use 2 year average from Pay Stubs |
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Base Yr. |
Lower |
< 90 days in YTD period |
Use 1 year average from CY-1 Pay Stub |
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Base Yr. |
Higher |
>= 90 days in YTD period AND Higher |
Use 1 year average from CY-1 Pay Stub |
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Base Yr. |
Lower |
>= 90 days in YTD period AND Higher |
Use 1 year average from CY-1 Pay Stub |
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Base Yr. |
Lower |
>= 90 days in YTD period AND Lower |
Use YTD salary only (CY), from paystubs only; no bonus, overtime, commission or tip income included (due to declining trend) |
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Base Yr. |
Higher |
>= 90 days in YTD period AND Lower but still > CY-2 |
Use YTD salary from paystubs (CAN include bonus, commission, overtime or tip income, if any). Trend is variable but not steadily declining. Using the lower CY figures is more conservative than averaging the higher CY-1 income as well. |
Second Jobs/Part-Time Income
A second job is considered stable income if:
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The Borrower's primary profession lends itself to a second job. |
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Income can be verified via written VOE, as having been received, uninterrupted, for at least the last one year. |
Borrower's Income per Job/Contract
A Borrower whose income per job/contract is equal to or greater than 25% of their total income is considered to be self-employed, see Self-Employed Borrowers.
Capital Gain Income
Income received from capital gains is not included in AmMAC’s income analysis, regardless of the likelihood of continuance.
Automobile Allowance
An automobile allowance may not be used to qualify and may not be used to offset a car payment.
Employed by Relatives or Transaction Participants
If the Borrower is employed by a relative or a closely held family business, the
current income reported on the pay stub may be used if it is consistent with W-2 earnings reported on the tax returns, and can be verified through our standard cross-check against the borrower’s bank statements, that is performed for all borrower salary income. If the tax returns or bank statements do not support the earnings reflected on the paystub, the borrower is not eligible for financing by AmMAC.
Military Income
Military personnel may receive different types of pay in addition to their base pay. The following forms of military compensation may be included in the Borrower's qualifying income:
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Flight or hazard pay |
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Rations |
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Clothing allowance |
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Quarters allowance |
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Proficiency pay (Propay) |
Military Income – Active Duty Personnel – Within 12 Months of Release from Active Duty
The date that the in-service borrower is scheduled to be released from active duty must be verified. The date of separation is on the enlisted personnel’s LES. An officer’s LES will not show a date of separation. In most cases, a copy of the Statement of Service is satisfactory verification of continued service. When the separation date is verified by a VOE, Leave and Earnings Statement, Officer’s Orders, or other documentation, and indicates the veteran will be released from active duty within 12 months of the projected date upon which the loan will be closed, the file must include ONE of the following in order for this income to be considered for qualifying:
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Documentation that the service member has re-enlisted or extended his period of active duty to a date beyond the 12-month period following the projected loan closing date; |
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Verification of civilian employment following the release from active duty (with all pertinent underwriting documentation, such as job position, rate of pay, start date, number of hours scheduled per week, and probability of continued employment); |
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A statement from the borrower indicating that he intends to re-enlist or extend his active duty to a date beyond the 12-month period AND a statement from the veteran’s commanding officer confirming that the service member is eligible to continue on active duty and the commanding officer has no reason to believe the re-enlistment or extension of active duty will not be granted; |
Military Income – Non-Taxable Income
AmMAC does not gross up non-taxable income (such as Social Security, housing, and subsistence allowances) so these types of income should not be treated any differently than taxable income.
Military Income – Reservist or National Guard (Called to Duty) Obligation
Brokers must ask every applicant, whose income is being used to qualify for a loan, if their income is subject to change due to participation in a reserves/national guard unit due to activation. When the answer is yes, brokers must determine what the applicant’s income may be if activated. If the income is:
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Reduced, carefully evaluate the impact the reduction may have on the borrower’s ability to repay the loan. |
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Increased, consider the likelihood the income will continue beyond a 12-month period. |
Underwriters must evaluate all aspects of each individual case, including credit history, accumulation of assets, overall employment history, etc. and make the best decision for each loan regarding the use of income in qualifying for the loan.
It is very important that loan files be carefully and thoroughly documented, including any reasons for using or not using reservist income in these situations.
Weigh the desire to provide a veteran their benefit with the responsibility to ensure the veteran will not be placed in a position of financial hardship.
To accomplish this, a statement that affirms that a veteran-applicant’s status relative to membership in the Reserves or National Guard has been ascertained and considered must be obtained. The statement should be made part of the origination package.
Military Reserve Income
For income to be used for qualifying purposes, substantiate income by documenting all of the following:
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The continuity of employment and income history for the two years that precede the date of the mortgage application |
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YTD Leave and Earnings Statement (LES) documenting at least one month of income |
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W-2s covering the most recent 2 years |
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Verbal VOE within 10 business days prior to note date. (In lieu of a verbal VOE, a military LES within 30 days prior to note date is acceptable.) |
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Provide proof that existing Service Commitment does not expire for at least 3 years. |
Mortgage Differential Income
An employer may subsidize an employee’s mortgage payments by paying all or part of the interest differential between the employee’s present and proposed mortgage payments. In order to be considered as income:
- The amount of the differential must be shown separately on the borrower’s pay stubs; and
- A copy of the agreement with the employer is required, and it must reflect that the payments will continue for at least 3 years from the date of our loan (a two year history of receipt is not required).
When calculating the qualifying ratio, the differential payments should be added to the borrower’s gross income. The payments may not be used to directly offset the mortgage payment, even if the employer pays them to the mortgage lender rather than to the borrower. Two-year history not required.
Relocation Income
Royalty Payments
Must have a 12-month history of receiving payments on a regular basis and be likely to continue for the next 3 years.
Verbal Verification of Employment
See Verbal VOE’s for verbal verification of employment requirements.
Disability Income/Survivor’s Benefits
Because of difficulties proving continuance of disability and/or survivor’s benefits, this type of income may not be included in qualifying income.
Social Security or Retirement Income
Retirement income may be used if properly verified. In all cases, our standard bank statement analysis must support the receipt of the income shown in the documentation below, in order to be included in qualifying income. Examples of acceptable documentation are:
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Letters from the organization listing the income |
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Copies of the retirement award letters |
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Tax returns |
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IRS 1099 forms |
Social Security and Pension benefits are considered to continue until death unless the award letter indicates a specific end date. No additional proof of continuance is required.
Foster Care Income
Income derived from foster care payments may be considered if written verification can be obtained that the income is regular, recurring and continued receipt is likely. A two-year history of providing foster care services under a recognized program from a state or county sponsored organization is required. Income used to qualify must be averaged over this two-year period. Projected income may not be used.
Child Support, Alimony or Maintenance Income
Child support, alimony or maintenance payments may be used as income only if this information is volunteered by the applicant, and if evidence that the funds are received on a continual basis is provided. In order to be used as income, these payments must reasonably be expected to continue for at least three years (from the application date).
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Documentation
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Non-Taxable Income/Grossing Up Non-Taxable Income
AmMAC does not allow non-taxable income to be ‘grossed up’.
Interest or Dividend Income
Interest and dividend income may be used in qualifying income, based on the lesser of the 2 year average from Schedule B of the tax returns OR AmMAC’s imputed yield on the assets remaining after subtracting for down payment and closing costs for our loan. AmMAC uses a reasonably conservative yield assumption across all asset classes, that is adjusted annually for changing market conditions. For 2014, that assumed yield percentage is 2.00%.
Notes Receivable, Installment Sales, and Land Contracts
Secured - A copy of the note is required to verify the payment amount and remaining term. Payments must continue for at least three years beyond the date of the mortgage application. A 12-month history of receipt must be verified with one of the following:
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Canceled checks |
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Tax returns |
Income from a recently executed note (less than 12 months), indicating a minimum duration of at least three years from the date of application, may not be used as stable income.
Unsecured - A copy of the note is required to verify the payment amount and remaining term. Payments must continue for at least three years. A 12-month history of receipt must be verified with one of the following:
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Canceled checks |
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Tax returns |
Trust Income
Trust income may be used if the trust income will continue for at least three years. A photocopy of the Trust agreement or the Trustee's statement confirming the amount, frequency, recipient, and duration of the payments should be obtained to verify the income and continuance of the income. Receipt of the income must be verified by the past 2 years filed tax returns in order to be included in qualifying income.
Foreign Income
Acceptable only if income can be verified on U.S. personal tax returns.
Unacceptable Income
The following types of income or compensation cannot be included when calculating the Borrower's qualifying income:
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Expense account payments |
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Automobile allowances |
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VA education benefits |
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Retained earnings in a company |
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Rent from boarders living in the Borrower's primary residence or second home |
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Proceeds from a reverse mortgage or other financing |
Top of Form
- Rental Income - General
Eligible Rental Income
Eligible rental income includes only rent received from properties held for investment purposes, whether commercial or residential.
Ineligible Rental Income
Ineligible forms of rental income include the following:
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Rent from boarders in a single-family property that is the Borrower's primary residence. |
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Rent from Live-in aides. |
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Rent from a property that is the Borrower's second home. |
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Rent from the Borrower’s previous residence that was either listed for sale and will not close prior to the AmMAC transaction, or that is being converted to investment property. |
Rental of Previous Residence Listed for Sale
If the Borrower’s previous residence was listed for sale but will not close prior to the close of their AmMAC transaction and will instead be rented, no credit for income will be given for the rental of the previous residence. See Mortgage Debt - Rental of Previous Residence for reserve requirements.
Previous Residence Held for Investment
If the Borrower(s) intend to use their previous residence as an investment property, there is no credit given for rental income on the previous residence. See Mortgage Debt - Rental of Previous Residence for reserve requirements.
Top of Form
- Rental Income – Property Other Than the Subject Property
Rental Income Used to Qualify
AmMAC evaluates income producing properties held in LLCs, as any other 1065 business, so the evaluation of that income stream is subject to the same documentation requirements as any 1065 business (see Evaluating Partnership Tax Returns).
For properties held personally, in order to consider rental income as part of qualifying income, we must either be able to verify receipt of rent via filed tax return(s) or via leases and bank statement deposits. Each of these options is described in more detail below. AmMAC limits the total number of personally held rental units to four (4) units total—whether in a single property or a combination of properties. Borrowers with more than 4 units of personally held rental property are not eligible for financing with AmMAC.
Documentation required for all rental properties where income is used to qualify:
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All properties listed on the 1003 Schedule of Real Estate Owned. |
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Verification of current vesting on all properties on the Schedule of Real Estate Owned, to ensure borrower still owns the property. |
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Copies of current, executed leases for all properties. |
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The Borrower’s prior 2 years completed and filed Federal Individual Tax Returns including Schedule E. |
Rental Income Not Used to Qualify
No documentation is required.
Qualifying Rental Income
When the rental income is derived from property other than the subject property, the qualifying rental income is the Net Cash Flow. Net Cash Flow is documented and calculated in one of two ways depending on whether the property shows on the most recently filed Schedule E.
Property Shows on Last Filed 1040 Schedule E (and has not been sold since the last filed tax return—any sold properties must be removed from Schedule E rental income prior to this analysis)
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Use the following to determine Net Cash Flow:
If Net Cash Flow is positive, include it in the qualifying income. If Net Cash Flow is negative, include it with the long term debts. The PITI for this property is already accounted for in the Net Cash Flow calculation so it should not be added to the long term debts. |
Property Does Not Show on the Last Filed 1040 Schedule E
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Must be able to validate monthly lease payment(s) to the most recent bank statements, or rental income from this property cannot be included (although any associated PITI payment must be included in debts). |
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Use the following to determine Net Cash Flow: Total Monthly Rent is as validated from bank statement/leases - 25% Vacancy & Expense factor (of verified income) - PITI (from 1003 Schedule of Real Estate Owned/and/or credit report) = Net Cash Flow |
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If Net Cash Flow is positive, include it in the qualifying income. If Net Cash Flow is negative, include it with the long term debts. The PITI for this property is already accounted for in the Net Cash Flow calculation so it should not be added to the long term debts. |
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