Qualifying a Borrower With Declining Bonus and New Side Income
Marcus applies for a $342,000 conventional loan to purchase a $380,000 duplex; he will live in one unit and rent the other. His documents show: base salary $96,000; annual bonuses of $18,000 in 2022, $12,000 in 2023, and $6,000 in 2024; overtime of $400 per month for the past 18 months; 1099 side work netting $9,600 in 2024, the first year he did it; and an existing rental duplex with gross rent $1,800 per month, PITI $1,400 per month, and a $4,800 annual depreciation add-back. The existing rental's Schedule E shows $0 net income after depreciation. The proposed loan's PITI is $2,380. Marcus has a $650 car payment. The AUS findings are not yet back. The LO wants to use all income to keep DTI below 36% and asks you whether the file qualifies.
1. Calculate Marcus's qualifying monthly income and DTI. What income should be excluded or adjusted?
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Base salary is $8,000 per month. The bonus is declining sharply, so do not use the two-year average of $1,250; use the most recent $6,000 annualized at $500 per month unless the employer documents a stable trend. Overtime of $400 per month has an 18-month history and can generally be used if it is likely to continue. The 1099 side work is first-year self-employment income and should be excluded absent a two-year history and strong documentation. For the existing rental, add the $400 monthly depreciation back to the $0 Schedule E net, producing $400 per month; do not also add the rental PITI as a separate debt. Qualifying income is $8,000 + $500 + $400 + $400 = $9,300. Total debt is $2,380 + $650 = $3,030. DTI is $3,030 / $9,300 = 32.6%, which is below 36%, but final approval still depends on AUS, credit, assets, and reserves.
2. The employer says the 2024 bonus is discretionary and not guaranteed. How should the LO treat it?
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Discretionary bonuses can be used only when there is a documented history and a reasonable expectation of continuation. A pattern of $18,000, then $12,000, then $6,000 shows instability. The conservative treatment is to use the most recent year's $500 per month or exclude the bonus entirely. The LO should obtain the employer's written explanation and the prior-year W-2s, then document the rationale. Using the $1,250 two-year average would overstate income and could create a compliance and credit-risk problem.
3. Marcus wants to use the 1099 side income because he has a signed 2025 contract. Does that change the analysis?
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Not automatically. Self-employment income generally requires a two-year history, and a contract for future work does not replace the actual history. A one-year self-employment history may be considered only with strong compensating factors, documented prior related experience, and underwriter approval. The LO should not include the $9,600 to force the DTI down. If the income is excluded, DTI rises only to about 34.0%, so the file may still work without it.