B3-3.3-01, General Information on Analyzing Individual Tax Returns (06/05/2019)

In analyzing a self-employed borrower’s personal income, the lender should focus on earnings trends and the actual sources of the income, not just on the total amount of the income. The lender must confirm the stability and likelihood of continuance for each source of income that the borrower reports on their IRS Form 1040. The lender should not include any income that does not appear to be stable or likely to continue. The lender should, however, consider all recurring income that the borrower can expect to continue receiving over time.

Income may be considered as recurring if the loan application package does not include any specific indication of an upcoming change in the borrower’s employment or income, the borrower’s employment history has no gaps or other significant fluctuations in income, and any income received under a contractual agreement (other than an “at will” contract) will continue to be received for at least three years.

Examples of recurring income include:

• regular salaries or wages,

• bonus or commission income that has been received on a consistent basis,

• interest income from long-term investments that are not being liquidated in connection with the mortgage transaction, and

• earnings from the operation of the borrower’s business.

Any nonrecurring loss (such as an extraordinary one-time expense) should not be included in the cash flow analysis; therefore, in developing the borrower’s qualifying income, the lender should adjust the borrower’s cash flow by the amount of any nonrecurring loss.