Underwriting a File Where Income and Funds Do Not Reconcile
Riverbend Mortgage is underwriting a conventional purchase loan with a $2,950 principal, interest, taxes, and insurance payment. The borrower earns an $8,500 monthly base salary. Overtime was $14,400 in 2023 and $7,200 in 2024, and there has been none in 2025. She received a $10,000 bonus in 2024 but no bonus in 2023. The automated underwriting findings use $9,700 of monthly income. The file also shows a $15,000 deposit 40 days before closing described as 'sold furniture,' with no bill of sale; a credit supplement listing a $420 monthly student loan that is in deferment for 18 months and was not included in the AUS debt; and $20,000 from the borrower's fiancée deposited eight days before closing. The gift letter is signed only by the borrower. Other monthly debts are $650. Closing is in 10 days, and the loan officer wants to know what can be cleared and what must change.
1. Recalculate the borrower's stable monthly income and debt-to-income ratio. What must happen to the AUS findings?
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The AUS income of $9,700 is not supported.
- Base salary: $8,500 is stable.
- Overtime: It declined from $1,200 per month to $600 per month and is now zero year-to-date. An underwriter should use the most recent level, $600, rather than a two-year average that overstates current income.
- Bonus: One year of bonus income is generally not a stable two-year history. Absent a documented guarantee or a second year, it should be excluded.
Supported income is therefore approximately $8,500 + $600 = $9,100 per month. The student loan is not in the AUS debt. If the loan will remain deferred at least 12 months beyond closing, the applicable guide may permit exclusion; otherwise include the documented payment or 1% of the balance. Including $420 gives total debts of $1,070 and a DTI of about 44.2%. Excluding it gives about 39.6%. The file must be re-run in AUS with corrected income and debt, and the underwriter must document the final income calculation.
2. How should the $15,000 deposit and the $20,000 gift be documented?
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The $15,000 deposit is large relative to monthly income and cannot be accepted on the borrower's explanation alone. A sale of furniture requires a bill of sale identifying the buyer and seller, the item or items, the price, proof of transfer, and evidence that the funds came from the buyer. If the source cannot be documented, the funds should be excluded from funds to close and reserves.
The $20,000 from the fiancée can be an acceptable gift under conventional guidelines because a fiancée is an eligible donor. However, the gift letter must be signed by both donor and borrower, state the amount, relationship, and that repayment is not required, and be supported by evidence of the donor's ability to give and the transfer. A letter signed only by the borrower is deficient. The eight-day deposit timing is acceptable if the transfer is fully documented.
3. What conditions should be met before closing, and what are the risks of closing on the current file?
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Before closing, the lender should re-run AUS with $9,100 income and the correct debt, document the student loan deferment or include the payment, source or exclude the $15,000 deposit, obtain a fully executed gift letter and donor documentation, and verify funds to close and reserves. If the corrected DTI or reserves fail program limits, the loan must be denied or restructured.
Closing on the original AUS would rely on overstated income and incomplete debt and asset documentation. That creates repurchase and investor-fraud risk, and it may violate the lender's underwriting and quality-control obligations. The loan officer should not pressure the underwriter to waive the issues or treat the borrower's unsupported explanation as verification.