Bonus income is one of the most commonly mishandled income types at application. LOs take application using a recent bonus without verifying the history requirement, then get a surprise from underwriting. The rules are consistent across agencies: 2-year history minimum, averaged over 24 months, and declining income requires analysis.
The 2-Year History Rule
Bonus income cannot be counted unless the borrower has received it for the most recent 2 years. A single large bonus received once does not qualify. If the borrower has received bonuses for less than 2 years but has a history of receiving them at the same employer with expectation of continuation, some lenders allow it with underwriter discretion, but this is not standard.
How Bonus Income Is Calculated
- ✦Add total bonus income from 2 most recent years of W-2s
- ✦Divide by 24 to get monthly qualifying income
- ✦If current-year YTD bonus is behind the prior-year pace, use the lower projected annual amount
- ✦If no YTD bonus has been received yet and bonus is seasonal (e.g., Q4 only), document the payment history and confirm with employer when bonus is expected
Declining Bonus Income
If year 2 bonus was lower than year 1, and YTD is tracking lower than year 2, declining income analysis applies. Underwriting may reduce qualifying income to the lower of the three data points or exclude bonus entirely. Get a letter from the employer explaining whether the decrease was situational (restructuring, role change) or reflective of a performance trend.
Documentation Checklist
- ✦2 years of W-2s showing bonus amounts separately from salary
- ✦Most recent 30-day paystubs showing YTD bonus
- ✦VOE confirming bonus eligibility and payment schedule
- ✦Employer letter if bonus has declined or is expected to change
Aria can walk through bonus income calculation, identify whether declining income rules apply, and flag documentation gaps before you submit the file. Ask at vicariointel.com.
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