In its broadest sense, “curtailment of income” means a reduction in your total monetary inflow. Used by lenders and credit providers, the phrase refers to a reduction in the regular income, usually salary and wages, that you have available to pay a monthly mortgage or other major purchase that requires financing.
Income typically refers to any money you receive. However, lenders generally do not include irregular or discretionary income sources, such as birthday gifts, money generated through a garage sale, or the sale of an asset such as a car. Instead, lenders look at money you can prove you receive regularly, such as salary, wages, alimony or child support. If you earn part of your income from commissions or bonuses but can demonstrate you have had a consistent annual income during the past several years by submitting tax returns or wage statements, a lender likely would consider that to be income as well when determining your qualifications.
Types of Curtailment
When you lose part or all of your income, your income is considered to be curtailed. For example, if your company institutes an across-the-board 10 percent pay cut for all employees, your income has been curtailed by 10 percent. If you will be furloughed for three months, your income will be curtailed during those three months. If you lose your job and have no income, you are facing a curtailment of your income until you find another one.
When you apply for a loan, mortgage or other credit product, you might have to report a curtailment of income if your earnings decrease after you submit your application but before you are approved. If a mortgage lender starts processing your application and you learn about a pay cut at work, you might still qualify for a mortgage, but have to put down a bigger down payment or pay a higher interest rate. Failure to report a curtailment of income might constitute fraud in some cases.
Why It’s Important
Lenders need to be aware of a curtailment of your income to determine whether you continue to be a good credit risk. For example, one of the financial indicators lenders examine when granting credit is your debt-to-income ratio. Your debt might include credit card payments, utilities, a car payment, student loan and your projected mortgage payment. A decrease in your monthly income might change your debt-to-income ratio enough to change the terms of a loan or disqualify you from being accepted.
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