For an automobile allowance to be considered as acceptable stable income, the borrower must have received payments for at least two years. The lender must include all associated business expenditures in its calculation of the borrower’s total DTI ratio.
There are two methods for calculating the income associated with an automobile allowance:
Actual cash flow approach:
- If the borrower reports automobile allowances on Employee Business Expenses (IRS Form 2106) or IRS Form 1040, Schedule C
- funds in excess of the borrower’s monthly expenditures are added to the borrower’s monthly income, or
- expenses in excess of the monthly allowance are included in the borrower’s total monthly obligations.
If the borrower used IRS Form 2106 and recognized “actual expenses” instead of the “standard mileage rate,” the lender must look at the “actual expenses” section to identify the borrower’s actual lease payments and make appropriate adjustments.
Income and debt approach:
- If the borrower does not report the allowance on either Form 2106 or Schedule C, the full amount of the allowance is added to the borrower’s monthly income, and the full amount of the lease or financing expenditure for the automobile is added to the borrower’s total monthly obligations.
Housing or parsonage income may be considered qualifying income if there is documentation that the income has been received for the most recent 12 months and the allowance is likely to continue for the next three years. The housing allowance may be added to income but may not be used to offset the monthly housing payment. Note: This requirement does not apply to military quarters’ allowance.
Military personnel may be entitled to different types of pay in addition to their base pay. Flight or hazard pay, rations, clothing allowance, quarters’ allowance, and proficiency pay are acceptable sources of stable income, as long as the lender can establish that the particular source of income will continue to be received in the future.
Military base pay, clothes allowance, combat pay, flight pay, hazard pay, overseas pay, prop pay, quarters allowance, rations allowance, variable housing allowance. (All military income can be combined and entered as Base Income in Section V for conventional loans.)