AI Mortgage Underwriting & Income Calculation: Fannie/FHA/VA Guide
A practical, lender-first guide to calculating income (W-2, variable, self-employed, rental) under Fannie Mae, FHA, and VA — and how AI automates it end-to-end.
Answer Box (snippet-ready, 55 words)
Correct mortgage income is documented, stable, and likely to continue. Agencies (Fannie/FHA/VA) use different averaging rules for variable income and specific documentation for self-employed and rental. Rapidio automates data extraction (1003, W-2, pay stubs, 1040, Schedule C/E, SSA-1099), applies current rules, and produces a transparent, underwriter-ready income report.
Why income calculation matters (and where AI helps)
Agency guidelines require income to be verifiable, stable, and likely to continue. Manual reviews slow files and raise redraws. AI-assisted workflows extract numbers from source docs, apply agency math consistently, and document assumptions — cutting turn-time while protecting quality.
Documents & data map: what each file needs
| Scenario | Key documents | How it’s used |
|---|---|---|
| W-2 base pay | Pay stubs, W-2, VOE (Form 1005), URLA 1003 | Verify base rate and YTD; AUS (DU/LPA) validates inputs. |
| Overtime / Bonus (variable) | Pay stubs + W-2 + VOE details | Averaging with required history; consistency and continuance documented. |
| Self-employed | IRS 1040 + Schedule C / business returns; transcripts if needed | Underwriter analysis of stable income; add-backs and adjustments per agency rules. |
| Rental income | Schedule E, lease agreements; property PITIA | Net rental per agency math; PITIA treatment in DTI clarified. |
| Retirement / SSA | SSA-1099, award letters | Count if likely to continue ≥ 3 years; document source and amount. |
Rules snapshot by agency
Fannie Mae (Conventional, DU)
- Variable income (overtime/bonus): documented history (often ≥12 months) and reasonable expectation to continue; average per guidance.
- Self-employed: written stability analysis based on IRS returns (1040 + schedules); address add-backs/declines.
- Rental: use documented net; DU can derive if not entered, subject to inputs.
- Manual underwriting: limited scenarios; check eligibility matrix and reserves.
FHA (Handbook 4000.1)
- Variable income: typically longer history (often 24 months) or well-documented consistency if shorter; average conservatively.
- Manual underwriting: compensating factors and tighter DTI; document capacity and reserves.
VA (Lender’s Handbook)
- Effective income: verifiable, stable, reliable, and likely to continue; case-by-case flexibility.
- Use VOE/W-2/pay stubs for non-military employment; alternative verification allowed under conditions.
Underwriter notes
- Document averaging method for variable income; explain exclusions.
- Self-employed: attach a concise written analysis (drivers, add-backs, sustainability).
- Rental: distinguish net rental vs. PITIA liabilities to avoid double counting.
Broker/LO tips
- Complete URLA 1003 fully before AUS to reduce Refer/Caution outcomes.
- For FHA manual, pre-collect compensating factors (reserves, low payment shock, no discretionary debt).
- SSA-1099: guide borrowers to retrieve digital copies if lost.
Common mistakes
- Mixing calendar and tax periods when averaging overtime/bonus.
- Using gross rent instead of documented net rental.
- Missing self-employed status when borrower owns ≥25% of a business.
- Skipping the written analysis for self-employed files.
Edge cases to watch
- Seasonal employment: establish yearly consistency and continuance.
- Commission income ≥25% of annual earnings: check expense treatment.
- Newly formed businesses: document sustainability beyond start-up.
How Rapidio handles it
1) Document ingestion
Parse URLA 1003, W-2, pay stubs, IRS 1040 + Schedule C/E, SSA-1099, leases; normalize YTD and period ranges.
2) Rules application
Apply current agency math (Fannie/FHA/VA) for variable, self-employed, and rental income. Log assumptions and edge cases.
3) UW & broker outputs
Generate an underwriter-ready worksheet and a broker-friendly summary highlighting changes and risk flags.
For VA-heavy pipelines, ask about our VA income analysis add-on.
FAQ
How does Fannie Mae treat overtime and bonus?
History and stability are key (commonly ≥12 months) with VOE details. Lenders average documented amounts and assess likelihood of continuance per current guidance.
What is manual underwriting?
A full risk review without AUS approval. Programs set specific DTI, reserve requirements, and compensating factors; document rationale carefully.
How do I calculate rental income for conventional?
Use documented net from Schedule E/lease. DU may derive net rental when inputs are complete. Treat property PITIA correctly in liabilities.
Which documents are needed for self-employed borrowers?
IRS 1040 with applicable business schedules (e.g., Schedule C) and, when required, transcripts. Provide a written stability analysis and note add-backs.
What is URLA 1003 used for?
It’s the Uniform Residential Loan Application capturing income, assets, liabilities, property, and declarations — foundational for AUS (DU/LPA).
Where can borrowers get an SSA-1099?
In their “my Social Security” online account or by requesting a copy from the Social Security Administration.
