National Guide: How Non-QM Underwriting Handles Declining Income Trends

A national field guide for mortgage brokers packaging Non-QM scenarios when year-over-year income is down

Search intent and audience

This guide is written for mortgage loan officers and brokers who routinely field scenarios where the borrower’s recent income is trending down relative to earlier periods. You will recognize these files in self-employed businesses with choppy billing, commission-heavy sales roles, investors who shifted strategy, or high-net-worth clients who optimized taxes. The aim is to explain how Non-QM credit teams read declining income, how they document stability, and which compensating factors reliably move a marginal file to approval without creating late-stage pricing surprises.

What “declining income” means in Non-QM

Declining income is a measurable downward trend between reporting periods that a prudent investor cannot ignore. Underwriters do not require a collapse before they raise the flag. A moderate decline is often defined as a reduction that is material enough to affect debt-to-income ratios, such as a meaningful gap between the most recent twelve months and the prior twelve months. The check is performed across multiple cuts of data. Reviewers compare year-to-date figures to the prior full year, quarter-over-quarter to detect acceleration, and in some programs a trailing three-month average to spot inflection points. The purpose is not to punish the borrower, it is to model the base case that will persist after closing.

When the latest period is lower, Non-QM frameworks typically lean on a lower-of logic. The income used to qualify follows the more conservative of recent calculations rather than a simple two-year average. If there is a convincing business case for normalization, an underwriter may accept a balanced method that caps the influence of a single soft quarter. If the borrower changed business models or had a one-time event that is documented, the file can still clear, but the narrative has to line up with bank statements, P and L, or other alternative documentation.

Borrower profiles that routinely trigger the decline rule

There are several common patterns. Self-employed owners who reinvested into growth show lower year-to-date draws while deposits remained healthy. Commission and 1099 sales professionals had a strong prior year that benefited from one large account, then shifted to a new book. Independent contractors in technology or media left a W-2 role and launched an LLC. Real estate investors paused acquisitions to work on occupancy or maintenance, which temporarily reduced cash flow. Asset-rich retirees moved from salary to portfolio income that fluctuates with market conditions, which means tax returns no longer tell the story. Each of these profiles can qualify in Non-QM, but they require meticulous documentation and a risk story that fits the numbers.

Documentation sets under each Non-QM path

Non-QM allows multiple ways to tell the income story when tax returns do not. Bank statement underwriting translates deposits into qualifying income by excluding transfers and one-off credits and then applying an expense factor that fits a service business model. A preparer-signed P and L only path can be used when the accounting is current and credible, often backed by a CPA letter that explains cost structure. Hybrid approaches use statements to corroborate the P and L. For investors who prefer property cash flow to carry the decision, the file may be best placed as a Investor DSCR loan where personal income is not central. In all paths, reserves and liquidity are evaluated separately from the income figure.

Core underwriting tests used to validate a decline

Underwriters run a series of simple but disciplined tests. The first is the trend test, which looks at rolling three-month and six-month income against longer periods to see if the slope is negative and by how much. The second is the variance test, which flags gaps that exceed a reasonable threshold for that business type. The third is a sustainability test that asks whether the current run rate, not the historical peak, can carry the payment. When necessary, analysts will request an updated month of statements to confirm whether the most recent period is stabilizing. For commission-heavy profiles they often request the pipeline, offer letters, or trailing commission schedules. For contractors they may review copies of task orders or option awards to confirm that the core revenue engine still exists.

How underwriters adjust the income figure in practice

Non-QM does not treat declining income as a binary pass or fail. It recalibrates the number. Many investors use a lower-of method between the most recent year, the prior year, and year-to-date annualized. When year-to-date is meaningfully below the prior year, the calculation weights the recent period. If the trailing quarters show a recovery that is documented by statements and invoices, an underwriter may average the most recent twelve months rather than anchoring only on the thinnest three months. For heavily seasonal businesses, analysts examine the same months in the prior year to separate seasonality from structural decline. The output is a qualifying income that a neutral third party can replicate from the file, which reduces re-trades and supports lock integrity.

When DSCR can bypass personal income

If the subject is a non-owner-occupied property and the investor prefers to lean on the asset’s cash flow, DSCR can remove the declining-personal-income conversation from the decision. The core question becomes whether net operating income covers PITIA at a ratio that fits the matrix. This channel lets sponsors with complex tax pictures focus on the building’s rent and expense reality. Use the Investor DSCR loan page as your primer and remember that reserves, experience, and property condition still influence pricing.

Compensating factors that rescue marginal files

Compensating strength often changes the outcome. Thick post-close reserves measured in months of PITIA provide time to adjust if revenue wobbles. Lower LTV reduces payment size and improves coverage, which offsets risk from a declining trend. Verified liquidity outside the business, such as brokerage accounts or retirement accounts with access after age thresholds, can show capacity even when draws are light. Time in business matters. A decade of continuous operation tells a different story than a brand-new entity. Secondary income streams that are well documented can be layered in when rules allow. These elements do not erase the decline, but they help an investor accept a conservative qualifying income without rejecting the loan outright.

Packaging a credible “why” behind the decline

The reason behind a dip matters. A credible business narrative is one page long and supported by evidence. If a contract ended but was replaced with a signed task order, attach it. If the company invested in equipment, marketing, or staffing that temporarily suppressed profit, show the invoices and explain how the spend supports future stability. If the prior year had an unusual windfall, state it plainly and explain why the new run rate is still strong enough to carry the home. If a medical event or time away affected earnings, avoid drama and give dates, then show that operations have normalized. The point is to demonstrate sustainability at the current level so the underwriter can choose a conservative, defensible number and approve the file.

Bank statement underwriting for choppy deposits

Bank statement programs were built to handle irregular deposits. The method starts by gathering 12 or 24 months of statements from either business accounts, personal accounts where business receipts flow, or both. The deposit scrub removes transfers between accounts, owner draws, cash infusions that are not revenue, and reimbursable expenses like travel. The remaining credits reflect true gross receipts. An expense factor, either from a program grid or from a CPA letter, converts gross receipts into an estimate of net qualifying income. For service businesses with light overhead, a custom factor supported by a preparer letter can materially improve the number. If the deposit rhythm shows quarter-to-quarter softness, the underwriter may prefer 24 months to dilute outliers and to confirm that the new level is still adequate.

Link your readers to the Bank statement mortgage explainer so they understand required statements, acceptable deposit types, and the documentation that speeds decisions. Emphasize that CSV exports help analysts categorize deposits accurately, which reduces conditions and keeps locks aligned with reality.

P and L only or hybrid strategies when returns are unhelpful

Some borrowers keep meticulous books. For these profiles, a preparer-signed P and L can provide a current and clean view of earnings that aligns to the same twelve or twenty-four month window used in the statements. A hybrid approach cross-references deposits against P and L categories to confirm reasonableness. In decline situations, this pairing is valuable because it separates reimbursables and one-time items from true margin. If the P and L shows a rebound in the latest quarter and the statements back it up, the underwriter can reasonably weight recent months more heavily while still taking a conservative posture.

Asset utilization and asset depletion when income is down

High-net-worth clients sometimes present declining wage or business income by design. Asset utilization and depletion methods convert liquid balances into qualifying income, which can remove the need to force a tax return story. Underwriters apply haircuts to retirement funds and concentrated equity, exclude pledged balances, and then impute income by dividing the eligible base by a program factor or by applying a draw rate. Reserves are separate and additive. This path is useful for primary residences and second homes where the balance sheet is strong and the plan is to keep portfolio strategy intact rather than realizing gains to inflate income. When you package these files, include recent brokerage statements, plan summaries for retirement accounts, and a memo that shows which accounts will hold funds to close and which will remain as reserves.

Foreign national considerations when income trends are complex

International buyers may have income and assets across borders. For these files, the decline question intersects with identity and funds verification. Focus on documentation that shows the stability of deposits into a U.S. or acceptable international account and a clear path for funds to close. Provide passport and visa documents and reference Foreign National mortgage options so the KYC flow is correct from day one. Underwriters will still apply conservative logic to declines, but strong liquid reserves and a transparent money path can carry a file that otherwise looks thin on traditional income.

Risk, compliance, and ability-to-repay guardrails

Non-QM loans still adhere to common sense ability-to-repay principles. That means the qualifying income has to be defensible and reproducible from the file. Funds to close must be sourced, seasoned, and free of red flags. Occupancy representations need to match how the property will be used. Anti-money-laundering checks apply to large or unusual transfers. If deposits jumped due to a liquidity event, provide the trade confirmations and narratives that explain timing. Conservative PITIA inputs prevent re-trades near clear-to-close, so quote insurance early and confirm HOA dues or assessments on condos and planned communities. The discipline protects your borrower and your lock.

Valuation and collateral realities when income tightens

When a borrower’s qualifying income steps down, collateral scrutiny steps up. Appraisers look for realistic rent schedules, verifiable marketability, and evidence that the subject does not need a perfect economy to support value. Order appraisal early so valuation and DSCR math, when applicable, move in parallel. If the home is a condo or a property with HOA dues, obtain master insurance and fee schedules early so payment math is accurate. In regions with catastrophe exposures such as wildfire, wind, or flood, binders impact PITIA and can make or break coverage. Tight files include insurance quotes and any special rider information in the initial packet so the underwriter is not surprised late in the process.

Reserve and liquidity playbook that offsets decline risk

Reserves are your most reliable lever. Present them in months of PITIA and label which accounts will remain after closing. Include a simple table that shows the pre-close balance, funds to close, and post-close remainder. Clarify that reserves are separate from the assets used to compute income in an asset utilization file and separate from deposits used to calculate income in a bank statement file. If a borrower’s income is lower than the prior year, strong reserves and conservative leverage can deliver a yes where a thin reserve position would not. Retirement accounts can count with access-based adjustments. Brokerage accounts count cleanly, subject to normal market volatility logic. Lines of credit are not reserves for underwriting purposes unless expressly permitted.

Broker talk track and objection handling

Explain to clients that the most recent period carries more weight because it is a proxy for what will continue after closing. Remind them that the goal is not to use the highest possible income figure, it is to use a conservative and defensible figure that produces an approval and terms that will age well. When borrowers push back on lower-of methods, frame it as the trade that protects their lock and reduces conditions. When they ask about improving terms, offer tangible options: add reserves, reduce LTV, clean up reimbursables in their deposit flows, or document the pipeline that will replace a lost contract. This language builds trust, shortens cycles, and leads to repeat referrals.

Location-aware examples of how declines are interpreted

Different markets present different noise in the numbers, which means your decline story should be grounded in local dynamics. In coastal regions affected by wind and flood, insurance premiums can rise materially year over year. If a borrower’s income also dipped, payment increases can exaggerate the appearance of risk. Early binder quotes are part of the solution. In university towns, summer and winter breaks create soft quarters that are normal. Comparing the same months year over year in a 24 month view helps analysts separate seasonality from structural issues. In mountain or resort economies, shoulder seasons between peak tourism periods are well known. Show how the business model compensates with off-season contracts or mid-term rentals so the coverage math is stable. In metro corridors where a large employer had layoffs, explain whether the borrower’s book of business is diversified enough to avoid dependency on one client. Underwriters are not trying to catch the borrower out. They are trying to build a base case that the market can support.

Operational checklist for clean, defensible files

Use a short, repeatable checklist. Scrub statements to remove transfers and one-offs. If you choose P and L only, align the P and L dates to the statement window and obtain a preparer letter. Build a simple trend table that shows year-to-date versus the prior full year and quarter-over-quarter change. Collect insurance quotes and HOA dues so payment math is accurate. For investment property include a clean rent roll and a T twelve with realistic vacancy and reserves. For asset utilization, include brokerage and retirement statements, plan rules, and a memo that separates funds to close from reserves. Put all of this into a single PDF packet for the appraiser and the underwriter so both teams read the same story.

Frequently asked questions that preempt conditions

Which period wins when trends conflict? The most recent defensible period usually carries more weight, often the lower-of-year-to-date annualized versus the prior year.

How much decline is too much? There is no single number, but sharper declines require stronger compensating factors like thick reserves and lower leverage.

Can I average two years if this year is lower? Sometimes, but only when evidence shows stabilization and when the investor’s matrix allows it.

When should I switch channels to DSCR? If the subject is investment use and the rent story is stronger than personal earnings, move to DSCR before you order valuation.

Do assets used to compute income also count as reserves? No. Reserves must remain after funds to close and cannot be double counted.

Can foreign nationals qualify when income is down? Yes, when identity and funds are documented and when liquid reserves are strong. Use the Foreign National mortgage options guidelines for specifics.

CTAs and internal links that convert without friction

Place simple calls to action at the end of your emails and pages. Use Get a Non-QM quick quote to open the file with a note that you will need statements and any CPA letters for the deposit scrub. Route investment properties to the Investor DSCR loan page to align expectations on coverage and reserves. For deposit-based underwriting, link to Bank statement mortgage and spell out acceptable statement formats. When applicable, include Foreign National mortgage options. Reinforce brand authority by referencing NQM Funding as a trusted Non QM Lender that understands trend risk and how to place complex files without drama.