In processing a borrower’s paperwork, it can seem like we fail our way towards the closing and then ask our customers: “How was the trip?” But in reality we should be guiding the customer towards the closing based upon our expertise…for many borrowers in the marketplace this is not happening. We should be saying, “This is the route you must follow to get where you need to go.”
There may be roadblocks and obstacles along the way and at times the journey to home ownership can be bumpy, but the Loan Officer should view their job as that of a guide…one who helps the borrower reach their ultimate destination.
Think of a good tour guide or a concierge you may have encountered while traveling. Not only is the guide familiar with the area to be explored, they have extensive knowledge of local customs and lores, as well as places of interest and places to avoid. Just as a guide prepares an itinerary in advance for his travelers to follow, he knows that part of being prepared is to be able to offer the traveler an alternate route or activity that would provide a better experience for his guests in the event that they cannot follow the original route. It all comes down to the 6 P’s:
Proper
Preparation
Prevents
Pitifully
Poor
Performance
And so it is in the mortgage business. Often in the course of preparing a loan file for submission to underwriting, roadblocks appear or obstacles arise. Usually there are practical solutions to solve these problems or detours to get around them, but occasionally a whole new route must be taken in order to get the borrowers to the closing table. Occasionally this new route may involve submitting more documentation from the borrowers than was requested at the outset of the transaction. This can be a major source of frustration for borrowers and sometimes is unavoidable, as I shall discuss later; sometimes the additional documentation requested can be attributed to poor planning or bad execution by the Loan Officer handling the transaction.
At its essence, originating/processing a mortgage loan is a manufacturing process. We gather the documents that are the raw materials to assemble the loan from the borrowers. These include income documentation, asset documentation, credit reports, the property appraisal and other property related items like tax and insurance information.
It is the responsibility of the Loan Officer to request and gather these components provided by the borrowers and organize them into a form that will allow them to be reviewed by underwriting.
The underwriter’s main task is to assess whether the package we have assembled is sufficient to determine if the borrowers are acceptable candidates for the mortgage loan, and whether they qualify for the financing. In many cases the underwriter will ask for additional supporting documentation to be provided as a condition of approving the loan request. This added documentation normally falls into the following two categories:
Income
Documentation that gives evidence of the borrowers past wages and that the earnings will continue in the future. Since the income is what is used to repay the loan, this is scrutinized carefully in underwriting. In a typical mortgage loan for salaried borrower we would need to obtain the most recent 2 years’ W2 forms to show past earnings and the most recent 2 pay stubs which normally covers a period of 30 days.
If the borrower is self employed, receives greater than 25% of their earnings from commission or bonus income, or owns rental properties, they need to provide the most recent 2 years personal and business income tax returns. This is due to the fact that these types of borrowers have an additional layer of risk from self employment. Since they own the business, we need to determine if the business is viable and will continue to provide a reliable income to the borrower in the future.
Providing income documentation that is sufficient to repay the mortgage is the single biggest hurdle faced by self employed borrowers, because many of these borrowers claim significant business expenses which reduce the amount of income they claim on their tax returns. The amount of income we use for self employed borrowers is not their gross (pre-tax) earnings, but rather, a 2 year average of their Net Profit, or Adjusted Gross Income which is the amount remaining after subtracting all their expenses and deductions.
The key difference between these two types of borrowers is that salaried borrowers do not incur expenses to operate and run the business…their employer incurs these expenses. A self employed borrower, on the other hand, has to spend money to make it…they spend it in the form of the operating expenses they pay out to buy inventory, staff and run their businesses.
Properly documenting a borrower’s income is a major source of irritation for borrowers because the Underwriter frequently requests more documentation than was originally provided by the Loan Officer. There may be pages missing from the tax returns, copies of documents that have part of the information missing, the salary stated on the loan application is not supported by paystubs, there may be unexplained gaps in earnings due to illness or seasonal employment, etc.
For these reasons it is incumbent on the Loan Officer to collect the correct income documentation from the borrowers upfront and actually look at the documentation they receive to make sure it supports the income stated on the loan application. If a loan gets into Underwriting and the Underwriter comes back asking for more documentation to support the stated income, it is possible the Loan Officer did not do their job properly, pure and simple.
So…the solution to this issue is to have all your income documentation in place, ready to give to the Loan Officer when the application is taken. The days of “Low Doc” lending have ended…we now have to completely document the earnings of the borrowers in order to have Underwriting approve their financing request. Nothing less will work. A loan officer who fails to prepare the borrowers for this is preparing to fail with the borrower’s loan application. A borrower who is not given a complete explanation of the transaction and income documentation required on the day of the application will not enjoy their trip to the closing table.
When I used the example of the tour guide earlier who had developed a high level of expertise to draw upon, I was thinking of income and the problems of analyzing and documenting the borrower’s income. An experienced Loan Officer has the expertise to deal with income issues that may arise, and has taken additional training so that they understand income taxes for self employed borrowers and thus can help his borrowers navigate the application process successfully.
So in order to successfully navigate the issue of income, a borrower must be requested to provide all the required supporting documentation to prove their income, and the Loan Officer must thoroughly review the documentation they receive to ensure it meets the needs of the loan and will be satisfactory to Underwriting. Any gaps in employment or variations or interruptions in earnings must be completely explained and thoroughly documented. The pay statements must jive with the earnings stated by the borrower.
Assets
These are the funds needed for the down payment on the house and to pay for the closing costs. This also includes the additional funds needed for covering 3-6 months of mortgage payments as liquid reserves after closing. The idea is that you have to show the Underwriter that you have the assets in place to buy and close on the property and that you have additional money at your disposal if a financial emergency arises after closing. Say borrowers close on the purchase of their home and then discover that the house has a water heater or appliance that needs to be replaced or repaired. If the reserve funds are there that contingency can be met and paid for without going into debt or diverting the money needed to make the mortgage payment for repairs.
When we ask for asset documentation we want copies of the most recent 2 months bank statements for liquid assets. These are checking and savings, money market accounts, CD’s, brokerage accounts and the like. Since most borrowers have a large percentage of their money in retirement funds (401K for example), lenders will accept the most recent quarterly 401K statement for this purpose.Many borrowers use the funds in the 401K to help meet the reserve funds requirement, but be advised that most lenders will only count 60% of the balance in a retirement fund for liquid assets.
When I review a borrower’s bank statements I am looking to see if the deposits and withdrawals make sense and appear to be reasonable for the borrowers. If their pay is automatically deposited from payroll this is easily seen. Sometimes a borrower will have a larger amount than is typical deposited into their account from a source other than payroll and this needs to be explained and the reason we need an explanation is that the borrowers cannot borrow money from an outside source for the purchase of a home. So any large deposit of withdrawal needs to be explained and fully documented. One practice I utilize is that I write notes directly on the bank statement to explain the source of a large deposit or withdrawal so the Underwriter is sure to see it when they review the loan file.
A common issue that arises when an Underwriter analyzes the assets is missing pages of the bank statements, and this drives underwriters and borrowers crazy.
If a bank statement states that there are 6 pages and only 5 are included in the file, the Underwriter will ask for the missing page. Most borrowers complain that there is nothing on the last page other than legalese and addresses for the institution and, while this is normally the case, the requirement is that ALL pages of the statement be provided. Not providing all the pages can cause your loan application to be delayed in Underwriting. Don’t let this happen … provide all the pages to the Loan Officer.
The common thread that is woven through all of this is that the Loan Officer MUST thoroughly reviews all the documents to make sure they are complete and will be satisfactory for Underwriting. It is the Loan Officer’s role to request the documentation needed to manufacture the loan and review the parts to make sure they fit together properly.
It is also the Loan Officer’s duty to review the income documents in order to determine if the income is sufficient to repay the loan and will be presented in the correct fashion to pass Underwriting review. It is also the Loan Officer’s responsibility to identify and question the source of large deposits and make sure they are properly documented and explained in the file.
In conclusion, what is left out of the submission package for Underwriting will certainly be requested later, and rather than have disgruntled borrowers 2-3 weeks down the line it is far better to take the time up front to get the right mix of parts for the final product. This is the best route to follow and will result in borrowers who continue to enjoy the journey towards closing on their purchase.
Robert H Ruth (Senior Loan Officer)
EverBank
401-789-4441 Office
401-743-4364 Cell Phone
Robert.Ruth@everbank.com
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