May 4, 2020
Orion’s underwriters and our broker clients are experts at qualifying borrowers. It is important for our brokers to know that unemployment benefits and proceeds from the Payroll Protection Program (PPP) impact mortgage qualifying. Put another way, is there a longer-term impact of receiving those funds, and from a mortgage perspective, what is the positive or negative if your client applies for a mortgage in the future?
Typically, income used for mortgage qualifying is income that appears on your client’s tax return, and income not on their tax return is not going to be used to qualify for a loan under most situations. Unemployment Benefits (UB) are taxable at both the state and federal level. Income must be of a "constant and continuing nature" to be used for qualifying. Constant is defined as having been received for two years and continuing means it will be received for at least three more years. Like most guidelines there are some exceptions to this guideline which your Orion AE can provide.
Anyone currently receiving UB, Fannie Mae, for example, has stated that it cannot be used unless it is seasonal, but.... "Unemployment compensation may be used in qualifying a borrower for a high LTV refinance loan whether it is seasonal or non-seasonal." While this is a Fannie guideline, most lenders will have an "overlay" in which their underwriting guidelines supersede Fannie's. It is very unlikely they would include a current recipient of UB that are non-seasonal as income.
What if your client receives UB now, goes back to work in a few months, and then applies for a mortgage? There is a very likely chance the income will be used to qualify for a mortgage. The gap in employment is easily explained as job loss due to the Covid-19 pandemic, they are back at work and earning again. Having UB in one’s income history is not a factor to automatically deny income or a loan. What is the history before the UB income and what is your client’s current income are what is important.
Is than an impact for small businesses that receive loans from the Payroll Protection Program? No. There is no benefit, but there could be a negative. Remember that the purpose of the PPP is to enable businesses to retain their employees and payroll through the C-19 pandemic. If the business can show that the funds were allocated properly to retain employees and the business operations (a percentage can go for office space costs, etc.) then the loan can be forgiven in total or in part.
Normally loans that are forgiven are considered taxable income. Under the CARE Act and its follow up there is a provision that the IRS will not tax amounts forgiven under the PPP. Further, the IRS code prohibits taking deductions against forgiven income to prevent double-dipping on tax savings. However, not only did Congress amend the tax code to have PPP forgiveness tax free, but also to enable deductions of expenses covered by the PPP, i.e. payroll and benefits to employees. From a mortgage qualifying perspective there is no benefit from the PPP regarding income. If the loan is forgiven it will not be used as income. If the loan is not forgiven, the balance must be repaid over a two-year term and shows as a liability.
All of this can be complicated. Please discuss your borrower’s situation with your Orion AE or Orion underwriters to see how best to move forward with financing their home.