Key takeaways
- →A declining trend across two or more years is a different underwriting problem than a single flat number, even when the raw average looks acceptable.
- →The core question is whether the drop is a temporary, explainable dip or the start of a structural decline — the documentation for each looks very different.
- →Where a clear downward trend exists, many lenders lean toward a more conservative figure — the lower or most recent year — rather than a flat average that would overstate current capacity.
- →The single most useful document on a declining-income file is usually an accountant's letter explaining the cause and the current outlook.
A two-year average of $95,000 and $70,000 blends to a number that looks fine on paper — but it hides the fact that income dropped 26% year over year, which is exactly the kind of trend an underwriter is trained to notice and a broker should get ahead of, not hope goes unremarked.
This matters most for self-employed and commission-based borrowers, where year-to-year swings are normal, but the principle applies to any income that moved down rather than staying flat or growing.
01 · Why does a declining income trend worry an underwriter more than a flat one?
Direction is information a flat average destroys. A borrower earning a steady $85,000 for two years and one earning $100,000 then $70,000 can average to nearly the same figure, but they represent very different pictures of near-term capacity — one stable, one trending down. Underwriting cares about capacity going forward, which is why the trend line gets read alongside, not instead of, the raw average.
02 · How do underwriters try to tell a temporary dip from a structural decline?
A temporary dip has a specific, one-off cause — a parental leave, an illness, a slow client that's since resolved, a deliberate one-time reinvestment in the business — and evidence the underlying business or role has otherwise continued normally. A structural decline shows no such single cause and instead reflects an ongoing shift — shrinking client base, a contracting industry, reduced hours that aren't expected to recover. The documentation that separates the two is an explanation, ideally third-party (an accountant's letter, current contracts on hand), not just the borrower's own account.
03 · Does a lender use the higher year, the lower year, or an average when income has dropped?
This varies by lender and file type rather than following one fixed formula, but the general pattern is a conservative lean: where a clear downward trend is present, many lenders will favour the lower or most recent year, or a weighted approach that gives more weight to the current period, rather than a flat two-year average that would overstate current capacity. This is exactly why the trend, not just the average, needs to be presented plainly in the submission.
A trend, explained, is a manageable file
Don't let a declining year speak for itself.
Treadstone's fulfillment associates build the narrative and documentation a declining-income file needs before it ever reaches a lender. Talk to us about a specific file.
04 · How does this play out specifically for self-employed and commission borrowers?
This is where the issue shows up most often, since a two-year NOA average is already the standard tool for these files — see our self-employed underwriting article and the worked calculations in GDS and TDS, Worked. A documented, explainable decline changes how that standard average gets applied — and in the more severe cases, the two-year average can stop being a workable basis for the file at all, which is its own separate problem covered in the next article in this series.
05 · What actually helps a declining-income file get approved?
- →An accountant or CPA letter explaining the specific cause and the current, near-term outlook.
- →Signed current-year contracts or an interim financial statement showing signs of recovery.
- →A larger down payment to offset the perceived risk.
- →A qualified co-borrower, where one is available and appropriate to the file.
06 · How should a broker package a file with a visible income decline?
Get ahead of the trend with a cover note before the underwriter has to ask about it — explain the cause, attach the accountant's letter, and lead with whatever current-year evidence exists. A declining-income file that arrives with no explanation reads as a problem the broker either missed or is hoping goes unnoticed; the same file with a clear explanation reads as a manageable, well-understood situation.
Frequently asked questions
This article is general information to help you scale — not a substitute for tailored advice on your specific business, licensing, or compliance obligations. All figures are illustrative examples for planning purposes; actual costs vary by province, market, and brokerage.