A 44% DTI Built on Overtime and a Consulting Business That No Longer Exists
Marcus applies for a conventional 30-year fixed purchase loan of $320,000 on a $400,000 townhome (20% down, primary residence). Total PITI including the $210 HOA is $2,480. His documentation shows:
- base salary $6,400/month, stable and verifiable;
- an $8,400 annual bonus paid every January, received in January 2024 and January 2025;
- overtime averaging $520/month over 24 months, but only $260/month over the last 8 months and trending down;
- 1099 consulting net Schedule C income of $16,800 in 2023 and $0 in 2024; his only client ended the contract in March 2024.
Monthly debts are a $445 car payment and $310 in student loans. Assets are $78,000 in savings, $96,000 vested in a 401(k), and a $12,000 gift from his mother. Estimated closing costs are $9,500. The AUS returns Approve/Eligible. The processor entered overtime of $520 and consulting income of $700 per month.
1. Compute Marcus's qualifying monthly income and DTI, and assess whether the AUS Approve/Eligible finding can be relied on.
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Line by line:
- Base $6,400 - stable salaried income, fully usable.
- Bonus $8,400/12 = $700 - two years of consistent receipt, so it can be averaged. If the 2026 bonus were expected to drop or the employer signals non-continuance, it must be reduced or excluded.
- Overtime - declining, so the analyst may not simply average 24 months. Using the recent 8-month rate of $260 is the defensible treatment unless the employer documents a temporary, explainable cause for the decline and the borrower has a two-year history. Choosing $520 overstates income by $260/month.
- Consulting - self-employment requires a two-year history and evidence of continuance. 2024 is $0 and the sole client terminated in March 2024: there is no current stream, so qualifying income is $0. The processor's $700 is a mechanical two-year average of a dead business and is wrong.
Qualifying income: $6,400 + $700 + $260 + $0 = $7,360/month.
Debt: $445 + $310 + $2,480 = $3,235.
DTI: $3,235 / $7,360 = 43.95%, roughly 44%.
The processor's inputs ($8,320 income) produced a roughly 38.9% DTI - a materially understated ratio. AUS output is only as good as the data entered; with corrected figures the file must be re-run, and any Approve/Eligible must be re-validated on accurate income.
2. Determine whether Marcus has enough money to close and to meet a two-month reserve requirement. How should the gift and 401(k) be treated?
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Cash needed at closing: $80,000 down + $9,500 closing costs = $89,500.
Verifiable liquid funds: $78,000 savings + $12,000 gift = $90,000. That leaves roughly $500 after closing.
Reserves required: 2 x $2,480 = $4,960. The borrower is short on liquid reserves.
401(k) treatment: vested retirement funds are generally usable for reserves (commonly at 60% of the vested balance to account for taxes and penalties, sometimes 70%), but not for down payment or closing costs unless they are actually liquidated and documented. 60% x $96,000 = $57,600, which comfortably satisfies $4,960 in reserves even though it cannot plug the funds-to-close gap.
Documentation to collect: a signed gift letter stating the donor's relationship, the amount, and that no repayment is expected; evidence of the donor's ability to give; and evidence of transfer into the borrower's account before closing. The mother is an acceptable donor for a primary residence. Separately, any recent large deposit into the $78,000 savings must be sourced - unexplained deposits can be excluded from usable funds, which would break the funds-to-close calculation entirely.
3. Ten days before closing, Marcus resigns from his job to launch his consulting business full time. What must happen to the file, and why?
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The file must be re-underwritten before closing, not after. Standard practice (and investor requirement) is a verbal verification of employment within roughly 10 days of closing; the borrower must also be asked whether his employment status has changed. Here the answer is yes, and it is material.
Why it breaks the original approval: the loan was approved on $6,400 of salaried base plus a two-year bonus history. Self-employment income requires a two-year history and, in most cases, two years of filed returns for the new business. Marcus has zero months. The salaried income that supported the 44% DTI disappears, and no substitute income currently qualifies.
Required steps: disclose the change to the lender and re-run AUS with $0 employment income; do not close on stale verifications or an expired VOE. If the borrower cannot qualify without the salary, the loan cannot close as structured - options are a co-borrower, a delay until the business produces two years of returns, or a different product with compensating factors that the investor will actually accept.
Advising the borrower to "stay on the payroll until after closing" while he is already gone would be coaching a misrepresentation and is a licensing-level problem, not a workaround.