The Impact of Variable Income on Mortgage Approval: A Comprehensive Guide

Chad Rankin / Aug 25, 2023 / Expert Articles

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In the bustling world of mortgages and real estate, adapting to changing norms is paramount. Today, we dive into a growing concern in the mortgage industry - the reclassification of income types, especially "variable income." It's essential for potential homeowners and borrowers to understand these shifts to ensure a smooth mortgage application process.

What is Variable Income?

Let's start at the beginning. Many hardworking folks earn an hourly wage and consistently work a full 40-hour week. Though this might feel like a salary, it's not technically classified as one. Herein lies the crux of the problem.

Picture this: You've occasionally taken a day off, not covered by vacation or sick leave. Or perhaps you've recently commenced a new job, and in the initial 90 days, they haven't paid you for holidays. These seemingly small factors now play a significant role in how mortgage agencies like Fannie Mae, Freddie Mac, FHA, and HUD perceive your income.

Recent directives from these agencies state that such income should be labeled as "variable." This is a departure from what many assumed was consistent, salaried earnings.

The Repercussions of the New Rules

The fresh perspective on variable income has complicated many people's financial scenarios. When mortgage teams, like ours at Rankin Mortgage, evaluate the total earnings against the days and weeks of the year, sometimes the math doesn’t add up as expected. When there's a discrepancy between expected yearly earnings and actual income, this triggers the "variable income" designation.

We've been in numerous discussions with Freddie Mac, Fannie Mae, and HUD. The emphasis on correctly classifying income is not just a whim – it's serious business. Lenders who mistakenly fund a loan based on perceived salary, when it’s, in fact, variable income, face significant penalties, including buybacks.

Furthermore, recent job starters aren't exempt. If you've just embarked on a new position, agencies might average your income from the past two years, even if it means factoring in earnings from a previous job.

Avoiding Mortgage Pitfalls

While our team is committed to going the extra mile, examining every option and ensuring that we can make things work, there are undeniable limitations. One of the gravest outcomes is receiving a pre-approval, committing to a property, only to discover later that the financial foundation isn't as solid as perceived. This can lead to heartbreaking scenarios like losing the property, wasting money on appraisals, and forking out for home inspections.

So, what's the solution? First and foremost, awareness is key. Understand your income type. If you're on an hourly wage, even if it feels like a salary, consider the broader picture. As much as possible, steer clear of taking unpaid time off. It might seem like a minor factor, but it can have a domino effect on your mortgage applications.

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In the ever-evolving landscape of mortgages and financial rules, staying informed is your most potent tool. If you're unsure about your status or have questions about how your income is classified, don't hesitate to reach out. Knowledgeable experts in the field, like our team at Rankin Mortgage, are always ready to provide clarity and guidance. Your dream home is within reach; just ensure you're building on solid ground.

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Chad Rankin

Hi, I'm a mortgage expert living in Massachusetts. I am also licensed to help with your home loan in several other States across the Country. Do you have mortgage questions? How can I help? View Profile

Chad Rankin NMLS # 490282 Senior Loan Officer 324 Grove Street Worcester, MA 01605 (508) 928-4141

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About Chad Rankin

Hi, I'm a mortgage expert living in Massachusetts. I am also licensed to help with your home loan in several other States across the Country. Do you have mortgage questions? How can I help?