B3-3.5-01, Income and Employment Documentation for DU (10/04/2023)

DU indicates the minimum income verification documentation required to process a loan application. This level of documentation may not be adequate for every borrower and every situation. The lender must determine whether additional documentation is warranted. If the lender is unable to determine the stability of the borrower’s income on the basis of the available documentation, the income must be removed and the loan resubmitted to DU.

The standards for employment documentation are the same for DU loan casefiles as they are for manually underwritten loans. For example, paystubs, W-2s, and tax returns must meet the same requirements without regard to the underwriting method. The following information describes DU considerations for specific types of income. For additional information, see B1-1-03, Allowable Age of Credit Documents and Federal Income Tax ReturnsB1-1-03, Allowable Age of Credit Documents and Federal Income Tax Returns, and Section B3–3.1, Employment and Other Sources of Income.

Note: Only actual employer information should be entered in the employment section of the loan application. For example, do not enter “retired” or “homemaker” as the borrower’s current employer.

DU offers a reduced level of income documentation for high LTV refinance loans. Refer to B5-7-02, High LTV Refinance Underwriting, Documentation, and Collateral Requirements for the New LoanB5-7-02, High LTV Refinance Underwriting, Documentation, and Collateral Requirements for the New Loan, for additional information.

When a component of the loan file is validated by the DU validation service, DU will issue a message indicating the required documentation. This documentation requirement may differ from those described below. See B3-2-02, DU Validation ServiceB3-2-02, DU Validation Service.

DU will require the following:

• a completed Request for Verification of Employment (Form 1005), 

• the borrower's recent paystub and IRS W-2 forms covering the most recent one-year period, or

• the borrower's recent Leave and Earnings Statement (LES) for military income and entitlements.

DU will require the following:

• a completed Form 1005, or

• the borrower's recent paystub and IRS W-2 forms covering the most recent two-year period.

DU will require the following:

• a completed Form 1005, or

• the borrower’s recent paystub and IRS W-2 forms covering the most recent two-year period.

When the second job income is not from self-employment, DU will require the borrower's recent paystub and IRS W-2 forms covering the most recent two-year period.

If the borrower is the business owner or is self-employed, the business owner/self-employed indicator must be checked in the loan application along with the percentage of ownership. DU will consider the borrower self-employed if the ownership share is 25% or more, or if the ownership share is not completed but the business owner/self-employed indicator is checked. If the ownership share is 25% or more, the income is entered in Monthly Income (or Loss) based on the lender’s calculation of net income (or loss) from self-employment. If the ownership share is less than 25%, the income is entered in Gross Monthly Income (base, bonus, overtime, etc.). Schedule K-1 income for these borrowers should be entered as Other in Gross Monthly Income.

For DU loan casefiles where two years of the most recent signed personal and two years of the most recent signed business federal income tax returns are required, business tax returns do not have to be provided unless the business is a corporation, an S corporation, a limited liability company, or a partnership. Under certain conditions, the requirements for business tax returns may be waived.

DU will issue a message permitting only one year of personal federal tax returns if the loan application indicates the borrower is self-employed with an ownership share of 25% or more, and the Start Date for all self-employed businesses is at least five years prior to the Casefile Create Date. If any of the borrower's self-employed businesses have a Start Date less than five years, DU will require two years of personal tax returns. DU will issue a separate message listing the requirements for business tax returns for all self-employed businesses, specifying that one- or two-years of tax returns are required based on the number of years the business has been in existence (determined by comparing the Start Date to the Casefile Create Date).

Refer to  B3-3.2-01, Underwriting Factors and Documentation for a Self-Employed BorrowerB3-3.2-01, Underwriting Factors and Documentation for a Self-Employed Borrower for additional information and requirements related to underwriting, documenting, and calculating self-employed income.

A verbal VOE is required for each employer. For requirements regarding verbal VOEs, see B3-3.1-07, Verbal Verification of EmploymentB3-3.1-07, Verbal Verification of Employment.

Other income must be entered in the loan application. DU supports a number of other income types. Income types not available in DU must be entered as “Other” income.

Refer to B3-3.1-09, Other Sources of IncomeB3-3.1-09, Other Sources of Income, B3-3.1-05, Secondary Employment Income (Second Job and Multiple Jobs) and Seasonal IncomeB3-3.1-05, Secondary Employment Income (Second Job and Multiple Jobs) and Seasonal Income, and B5-6-02, HomeReady Mortgage Underwriting Methods and RequirementsB5-6-02, HomeReady Mortgage Underwriting Methods and Requirements, for information on eligibility and verification of other sources of income.

When income from temporary leave is being used to qualify for the mortgage loan, the lender must enter the appropriate qualifying income amount into DU based on the requirements provided in B3-3.1-09, Other Sources of IncomeB3-3.1-09, Other Sources of Income.

• If the borrower will return to work as of the first mortgage payment date, the lender can consider the borrower's regular employment income in qualifying and must enter the income into DU using the applicable income type.

• If the borrower will not return to work as of the first mortgage payment date, but is able to qualify using the lesser of the borrower's temporary leave income (if any) or regular employment income, that “lesser of” income amount must be entered into DU. Entry of the income into DU depends on what was derived as the “lesser of” amount:

  • When the borrower's temporary leave income is used, enter the income amount into DU using the other income type Temporary Leave.

  • When the borrower's regular employment income is used, enter the income amount in DU using the applicable income type.

• If the borrower's temporary leave income is less than the regular employment income and the lender is able to “supplement” the temporary income with available liquid reserves (per B3-3.1-09, Other Sources of IncomeB3-3.1-09, Other Sources of Income), the following must be applied:

  • The lender must enter the combined temporary leave income and supplemental income from reserves in DU using the other income type Temporary Leave. The combination of these two incomes may not exceed the borrower's regular monthly employment income.

  • As DU is not able to determine that supplemental income is being used, nor is it able to determine the amount of reserves used to supplement the temporary income, the lender must manually reduce the amount of the borrower's total liquid assets by the amount of reserves used to supplement the temporary income (in order to avoid the reserves being used for both income and assets).

DU does not provide any unique messaging identifying the use of adjusted gross income.

See  B3-3.1-01, General Income InformationB3-3.1-01, General Income Information, for guidance on how to calculate adjusted gross income for nontaxable income. This topic also defines the requirements that nontaxable income must meet to be considered for qualifying purposes in DU. If these requirements are not met, the borrower’s income must be adjusted downward.

Note: Certain loan origination systems offer an automatic calculation of adjusted gross income when nontaxable income types are entered in the loan application.