The Borrower Who Wants Income 'Smoothed'
Originator Ray is working with a borrower, Elena, on a $410,000 purchase. Elena is W-2 employed and earns a base salary of $78,000. She also receives a $12,000 annual bonus that her employer has paid for only one year (2024). Elena asks Ray to 'average in' the bonus over two years so her income looks higher, and she offers to provide a letter from her supervisor saying the bonus is 'likely to continue.' Elena also mentions she has a $30,000 gift from her parents for the down payment but does not want to provide a gift letter because 'it's family.' Ray's processor says 'just use the bonus - the supervisor letter is good enough.'
1. Can Ray use the $12,000 bonus in qualifying income? Explain the standard.
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Generally no - or at most with heavy caution. Variable income such as bonuses must have a two-year history and a reasonable expectation of continuance to be used. Elena has only one year of bonus history (2024). A single year does not establish a stable, recurring pattern.
The supervisor's letter saying the bonus is 'likely to continue' is not sufficient on its own; underwriters typically require a documented history plus evidence of continuance (e.g., employer verification of the bonus structure, prior years' awards). Since only one year exists, the bonus should generally be excluded from qualifying income.
Ray should not 'average' a single year - averaging requires at least two years. The processor's suggestion to rely on the letter alone is an underwriting shortcut that creates repurchase and fraud risk.
2. What is the correct treatment of the $30,000 gift, and why does the gift letter matter?
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A gift for down payment is generally acceptable for a primary residence, but it must be documented with a signed gift letter identifying the donor, the amount, the relationship, and stating that no repayment is expected. The donor's ability to give (source of funds) may also need verification, and the funds must be transferred and sourced (bank statements showing the deposit).
Elena's refusal to provide a gift letter is a red flag: without it, the funds cannot be verified as a gift and may be treated as an undisclosed loan (which would affect DTI) or as an unacceptable source. 'It's family' is not documentation.
Ray should explain that the gift letter protects both Elena and the lender, and that without it the $30,000 cannot be counted toward down payment or reserves. If Elena truly cannot document it, the loan may not qualify.
3. Identify the ethical issues in this file and how Ray should respond to both Elena and the processor.
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Ethical issues:
- Income inflation - Elena asks Ray to 'average' a one-year bonus to look better; Ray must use accurate, documented income, not a favorable presentation.
- Processor pressure - 'just use the bonus, the letter is good enough' invites Ray to accept inadequate documentation. Ray must follow underwriting standards, not convenience.
- Undocumented gift - accepting $30,000 without a gift letter risks misrepresenting the borrower's funds and could facilitate fraud.
Ray's response:
- To Elena: explain honestly that the bonus cannot be used without a two-year history, and that the gift letter is required. Offer alternatives (larger documented down payment, co-borrower, different program) rather than promising approval.
- To the processor: decline the shortcut, document the file, and escalate if pressure continues.
- To compliance: flag the pattern if the processor routinely pushes undocumented income.
Core principle: the originator's duty is accurate, verifiable information - never 'smoothing' numbers to fit a target.