For a Fannie Mae loan, a self-employed borrower reports $146,000 of income in the earlier year and $98,000 in the latest year. The decline is unexplained and current stability has not been established. What should the underwriter do before using this income?
Correct Answer
B) Investigate the decline and document stable, continuing income before selecting a qualifying amount
B. Resolve the decline and establish supported continuing income. The $48,000 decline creates an unresolved trend, not just a choice between two arithmetic methods. The $122,000 average is mathematically correct, but calculation alone does not demonstrate that this income is reliable for future payments. Scope and exceptions: This Fannie Mae scenario does not supply enough information to calculate a final qualifying amount. Cash-flow adjustments and the business’s continued viability still need evaluation. Source: B3-3.5-01, Factors to Consider; Analysis of Borrower’s Personal Income and Business Income — https://selling-guide.fanniemae.com/sel/b3-3.5-01/underwriting-factors-and-documentation-self-employed-borrower
Why This Is the Correct Answer
B. Resolve the decline and establish supported continuing income. The $48,000 decline creates an unresolved trend, not just a choice between two arithmetic methods. The $122,000 average is mathematically correct, but calculation alone does not demonstrate that this income is reliable for future payments. Scope and exceptions: This Fannie Mae scenario does not supply enough information to calculate a final qualifying amount. Cash-flow adjustments and the business’s continued viability still need evaluation.
Why the Other Options Are Wrong
Option A: Use $98,000 without further analysis because the lower year is conservative
Selecting the lower historical number does not establish current stability.
Option C: Use the two-year average of $122,000 because both tax returns are verified
Verified returns establish historical figures, not automatic acceptance of their average.
Option D: Exclude self-employment income solely because any year-to-year decline makes it ineligible
A decline calls for analysis; it does not establish an automatic prohibition in every case.
Exam Tip
Prove that income is usable before deciding how much to use.
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