Income
Declining income
Declining income is one of the most scrutinized areas in underwriting. Treatment varies by program type, and in all cases the direction and stabilization of the decline determines whether income is eligible — and if so, at what amount.
Three-Tier Classification Framework
Multiple lenders apply a consistent three-tier model:
- Tier 1 — Stable or Increasing: Income is averaged over the full 24-month period.
- Tier 2 — Declining but Stable: The 24-month trend shows a decline, but the most recent 12 months have stabilized. Per Mega Capital Simple MVP: "If 24-month average shows a decline, but most of the recent 12 months has stabilized & there is no reason to believe that the income/employment will not change the most recent 12-month average may be used." Newfi Lending Sequoia NQM uses identical language: "If 24 month average shows a decline, but most recent 12 months has stabilized & there is no reason to believe that the income / employment will not change the most recent 12 month average may be used."
- Tier 3 — Actively Declining (not stabilized): Income is ineligible. Both Mega Capital Simple MVP and Newfi Lending explicitly state: "Income is ineligible." Greenbox reinforces this: "If the bank statements reflect an ongoing or consistent downward trend without evidence of stabilization, the income is considered unstable and the loan is ineligible."
Lender-Specific Guidelines
Mega Capital — MVP / Non-QM Full Doc
- All borrowers (general rule): "In cases where a borrower(s) income is declining or shows unusual or unexpected fluctuation, careful consideration must be given to the income being reviewed and the reason for the decline or fluctuation. Proper discretion must be exercised to determine the extent or probability of impairment of the borrower's income and earning ability moving forward. Conservatively, the lesser income should be used when a declining situation is present. A letter of explanation is required from the borrower(s) to support the circumstances. Borrowers that show continued declining income without a reasonable explanation or proof that the trend will not continue are not eligible to use that income for qualification."
- Self-employed borrowers: "Declining income – Self-employed: Declining income of the last two (2) years may be utilized for qualifying with signed letter of explanation from the Borrower. Lower of the two (2) years would then be used to qualify unless the income has stabilized over the most recent six (6) months."
- Bank Statement (24-month business): "If a Borrower has declining income and is qualifying with twenty-four (24) months of business bank statements, the last twelve (12) months of income will be utilized to qualify."
Mega Capital — Simple Elite Bank Statement
- "If income is declining year-over-year, then the lowest income year will be used to qualify the borrower. A letter of explanation detailing the reason for the decline and the possibility of further income deterioration is required."
- "Any decline or large fluctuation in income that is documented in the file requires an explanation from the borrower regarding the decline/fluctuation."
Mega Capital — Platinum Jumbo / Platinum Jumbo Express
- General rule with documented exception path: "When the borrower has declining income, the most recent twelve (12) months should be used. In certain cases, an average of income for a longer period may be used when the decline is related to one-time capital expenditure and proper documentation is provided. In all cases, the decline in income must be analyzed to determine if the rate of decline would have a negative impact on the continuance of income and the borrower's ability to repay. The employer or the borrower should provide an explanation for the decline, and the underwriter must provide a written justification for including the declining income in qualifying."
- YTD P&L (Jumbo Express): "If the Year-to-Date profit & loss statements reflects a downward income trend the lower income reporting on the YTD Profit & Loss must be used for qualification."
Greenbox
- 20% threshold triggers methodology change: "Income is considered 'Stable or Increasing' if the current annual income is equal to, greater than, or no more than 20% below the prior year; in these cases, the income is averaged over the 24-month period. If the 24-month trend shows a decline of 20% or more year-over-year, the income may still be used if it is 'Declining but Stable.' This requires the most recent 12-month period to show stabilization with no reason to believe employment will change. In this specific case, the underwriter should use the most recent 12-month average of income rather than the full 24-month average."
- YTD earnings: "If YTD earnings show a significant decline (greater than 15% decline year-over-year), the lower current average must be used."
Mega Capital HELOC — Variable Income (Bonus, Overtime, Commission, Secondary Employment)
- "Bonus or overtime income must be averaged over the most recent 2 years unless it is declining, then the most recent 12 months will be averaged."
- "Secondary employment and/or multiple jobs income must be averaged over the most recent 2 years unless it is declining, then the most recent 12 months will be averaged."
- "Commission income must be averaged over the most recent 2 years unless it is declining, then the most recent 12 months will be averaged."
Newfi Lending — Full Doc
- "When the borrower has experienced a significant decrease in income, the income cannot be averaged using a previous higher amount. Any significant decrease in income must be documented to show the negative trend has reversed or stopped. Note: A significant increase or decrease is generally considered to be 25%. If the change in income is severe, it's use will be subject to underwriter discretion."
Agency Guidelines
Fannie Mae — Variable Income (Bonus, Overtime, Commission, Interest/Dividends, Capital Gains)
- General variable income (decreasing): "The lender must confirm the current income level has stabilized after the decline; otherwise, the income is not eligible for qualifying. To calculate income, use the year-to-date income divided by months elapsed in the current year."
- Interest and dividend income (decreasing): "Calculate an average income amount using the most recent year personal federal income tax returns."
- Capital gains income (decreasing): "Calculate an average income amount using the most recent year personal federal income tax returns."
FHA — Self-Employed Income
- 20% threshold and stability path: "Income obtained from businesses with annual earnings that are stable or increasing is acceptable. If the income from businesses shows a greater than 20 percent decline in Effective Income over the analysis period, the Lender must document that the business income is now stable. A Lender may consider income as stable after a 20 percent reduction if the Lender can document the reduction in income was the result of an extenuating circumstance, the Borrower can demonstrate the income has been stable or increasing for a minimum of 12 months, and the Borrower qualifies utilizing the reduced income."
- Mandatory calculation: "The Mortgagee must calculate gross Self-Employment Income by using the lesser of: the average gross Self-Employment Income earned over the previous two years; or the average gross Self-Employment Income earned over the previous one year."
Quick-Reference Decision Table
| Scenario | Qualifying Income | Key Condition |
|---|---|---|
| Stable or Increasing | 24-month average | Standard documentation |
| Declining but Stabilized (recent 12 months flat) | 12-month average | No reason to believe further decline |
| Actively Declining (no stabilization) | Ineligible | Income cannot be used |
| Self-Employed — Mega Capital MVP | Lower of two years | Signed LOE required |
| Self-Employed — Mega Capital Platinum Jumbo | Most recent 12 months (exception: one-time capex with docs) | UW written justification required |
| Self-Employed — FHA | Lesser of 2-year avg or 1-year avg | Stability docs required if >20% decline |
| Variable income (bonus / OT / commission) | Most recent 12 months if declining | LOE typically required |
| Bank Statement 24-month — Mega Capital MVP | Last 12 months only | Third-party expense statement required |
Underwriting Conditions Summary
- Stabilization is the pivotal test across all programs — a declining trend does not automatically disqualify, but documented evidence that the most recent 12 months are flat is mandatory before income can be used.
- LOE is universally required when declining income is present, regardless of program type.
- UW written justification is required under Jumbo programs when qualifying with declining income.
- Active, ongoing decline = ineligible — if the borrower cannot demonstrate the trend has stopped, the income cannot be used for qualification.
- FHA 20% threshold is the agency-level bright line; beyond that drop, additional stability documentation is mandatory before income can be treated as effective.
