December 5, 2024 • 48 mins
Underwriting can often feel like a complex maze for loan officers, but mastering it is key to ensuring smooth loan approvals. In this episode of Loan Officer Training, we tackle the most common underwriting challenges and share actionable strategies to overcome them.
From navigating tight guidelines to resolving credit or income inconsistencies, you’ll gain valuable insights into what underwriters look for and how to better position your loan applications for success. Learn how to anticipate potential red flags, improve communication with underwriting teams, and streamline the process for both you and your clients.
If you’re ready to enhance your understanding of underwriting and close loans more efficiently, this episode is a must-listen!
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The Mortgage Calculator is a licensed Mortgage Lender (NMLS #2377459) that specializes in using technology to enable borrowers to access Conventional, FHA, VA, and USDA Programs, as well as thousands of Non-QM mortgage loan program variations using alternative income documentation!
Using The Mortgage Calculator proprietary technology, borrowers can instantly price and quote thousands of mortgage loan programs in just a few clicks. The Mortgage Calculator technology also enables borrowers to instantly complete a full loan application and upload documents to our AI powered software to get qualified in just minutes!
Our team of licensed Mortgage Loan Originators can assist our customers with Conventional, FHA, VA and USDA mortgages as well as ac
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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Restream recording Dec 05, (00:00):
Mhm.
Good morning or good afternoon,everyone.
Thank you for joining us fortoday's training.
Today we have another greattraining.
It seems like we've had somepretty, uh, good stuff the last
couple of training stuff that Ihope you will definitely be able
to use.
Uh, just last night I used the,um, uh, the one on, uh, properly
(00:23):
explaining the benefits of arefinance to, uh, to a borrower
and, uh, used, uh, all of theguidance.
that was provided on thattraining to, uh, basically, uh,
put the borrower at ease and letthe borrower know that we were
looking out for her bestinterest, uh, overall.
(00:47):
And that's what got us the deal.
We were competing with multipleother, uh, lenders.
For that deal.
But she felt that, uh, myprofessionalism and combined
with my sincerity to assist herwith the refinance, uh, is what
got us to deal.
She felt like, um, I was notjust treating her like another
(01:10):
commission, right?
We were actually concerned, uh,because I really honed in on,
um, what was her objective andmaking sure that the refinance.
that she wanted to do really mether objective.
So today's training is onunderstanding underwriting
(01:33):
challenges for loan officers,right?
This is a great one.
This is the one that's going toallow your file to get off on
the correct trajectory.
Right.
You don't want to assumeanything on a file.
As a matter of fact, on the onethat I, um, did yesterday was
originally started by anotherMLO.
(01:54):
Uh, the file has a DSCR rate,uh, DSCR rate and term refi.
But in the end, what we aredisclosing is a non QM full doc
loan getting the customer, uh, Ibelieve almost a half a percent
(02:15):
lower interest rate at twopoints lower cost, right?
So that, that actually ties intoThe training we're going to do
today on understandingunderwriting challenges, because
if you understand what thechallenges are in the loan and
the proper way to meet thosechallenges, you can structure
(02:35):
your loan correctly.
And, um, not only structure itcorrectly, but help the customer
meet their goals.
The objective.
So let's get right in on it herebecause this is the one that's
going to get you the deals.
Make sure that your deals close.
So, um, what exactly do we meanby loan underwriting?
(02:57):
Right?
What is underwriting actuallymean?
Well, excuse me.
Underwriting is a process ofdetermining and quantifying the
risk on a file by reviewing thefile's income.
Assets, debt, and propertydetails to ensure eligibility
according to a set guidelines.
(03:21):
And now, you know, we're allabout guidelines here at the
Mortgage Calculator, so I'mgonna touch on guidelines a
little bit lower down this page,but let's talk about what are
the challenges that can be met,that can be faced, and um,
different ways that we can meetthem.
Right.
So most of the issues usuallycould revolve around inaccurate.
(03:44):
incomplete or missing data.
So let's touch on the differentcomponents of the loan file that
the underwriter is going toreview, right?
Obviously the first componentand underwriting, and remember
you as the MLO, I sayunderwriter here, right?
But in essence, you are theinitial underwriter on a file.
(04:07):
When you're pre approving theborrower, uh, taking that loan
application, because remember atthe mortgage calculator, when we
pre approve a borrower, we'recompleting a loan application.
If it's a TBD pre approval for apurchase, we're not going to
have a property.
But if it's a refi, we alreadyhave a property.
(04:30):
So components that we are goingto be looking at First one would
be the borrower, right?
So you definitely want to makesure that you know what type of
borrower you have.
What borrower type are youdealing with?
So that then you could reviewall of the applicable guidelines
(04:51):
for eligible or ineligibleborrower types.
and eligible or ineligibleoccupancy by a particular
borrower type for a particulartransaction type, right?
So, um, just note, right?
I mean, if it's a four unitproperty and it's primary, or if
(05:14):
it's a Um, you know, I canborrow whatever borrower type
you have, um, to give anexample, I, I was helping a loan
officer structure a file theother day, and this loan officer
thought that just because theforeign national, this is a
foreign national borrower, buthe thought because a foreign
(05:34):
national borrower had an ITIN.
Which is an international tax IDnumber.
That is just a document whereyou're given a number so that
you can file tax returns.
Typically that's a number givento non U.
S.
residents that do not havesocial security numbers so that
(05:55):
they can file tax returns for.
For example, properties, theymay have properties in an LLC
and they may need to file theirincome and expense report with
the government, right?
With the U S government thatdoes require you to do so.
So they're not working in the US right.
They just have an investmentproperty here.
They have to file a tax return.
(06:15):
And the only way to file a taxreturn is with an ITIN.
So most people saying ITIN.
number, but the N in ITIN isactually the number.
It's an ITIN document,international tax, uh, excuse
me, individual taxpayeridentification number.
So, um, after reviewingadditional documentation, the
(06:37):
borrower provided like theirforeign passport and their visa
that they have were granted tobe able to come to the U S it
was determined that they, theborrower was not an ITIN
borrower, but was actually aforeign national borrower.
And guess what?
The foreign national loan had alower interest rate and lower
(07:01):
cost than the ITIN borrowerloan.
Uh, so we ended up, uh,structuring that deal and
disclosing it to a very happyborrower, but that's just one
example where incorrectlycategorizing a borrower Could
get your loan off on theincorrect trajectory.
(07:21):
And then when it gets tounderwriting.
You're going to get denied orthe loan is going to get
suspended and they're going tohit you with like a whole bunch
of conditions which really wereunnecessary and you were just
conditioned for that because youstarted the loan off with an
incorrect borrowercategorization.
(07:41):
Another challenge is going to bewith a loan originator that
submits an incomplete file.
Now that's the biggestchallenge, right?
You're submitting.
A full doc file, for example,and you don't have all your
income documentation in line.
Maybe now at the mortgagecalculator, we try to screen the
files to make sure that files donot get submitted to
(08:03):
underwriting with incompletedocumentation.
Um, but those things can happenwhere the file gets reviewed.
And when the underwriter looksdeep into the file, they find
out that there's a lot of stuffmissing, or it could be that the
loan originator Did not properlyreview the applicable guidelines
(08:25):
for the product, right?
Maybe it was an agency file.
And they just assumed whateverthey assumed and didn't review,
didn't review the overlays thatthat particular investor or
lender has on their product, onthat particular product.
And be aware, overlays are notchanges to the product.
(08:49):
To the guideline overlays arejust additional restrictions
that the lender or investor puton the product that they are
buying, right?
They buy those loans and they'regoing to put certain conditions
on the loans that they're goingto buy.
You, you, for example, if it's aconventional loan, um, using
(09:12):
Fannie Mae guidelines, yousubmitted it to automated
underwriting to be you then, buta lender X, Y, Z.
May have an additional overlaythat, uh, the credit score is
below a certain amount.
They require, uh, additionalreserves or something like that,
right?
That's not going to be in theFannie Mae selling guide.
(09:34):
But that could be on thatparticular investors overlays on
loans that they're going to buy.
So again, loan originators haveto make sure that whatever file
you want submitted to under, youknow, you're going to submit,
have it, have it be as completeas possible.
And as we, as we go, Through theadditional challenges here in
this presentation, you are goingto understand what I mean by
(09:57):
reviewing it and making surethat you're submitting a
complete and accurate filebecause if not, you're just
shooting yourself in the foot.
You're going to get hit with alaundry list of conditions and
what could have been a cleanapproval.
Is all of a sudden going to be asuper complicated suspense,
(10:17):
which means your file is notapproved.
They are asking you foradditional documentation to be
able to consider approving it.
It's borderline going to bedenied because you just confused
the heck out of the underwriter.
And they don't know how to makeheads or tails of your file
because there were probablymissing letters of explanation.
For extenuating circumstancesthat you wanted them to
(10:40):
consider.
Because remember the following.
Underwriters are not mindreaders, right?
I mean, I like to say that Ilike to provide letters of
explanation for a letter ofexplanation, right?
Which means Bara may beexplaining a scenario.
Providing some documentation.
I'm going to get their letter ofexplanation.
(11:00):
I'm going to get thedocumentation, and if it's not
as complete as I think it is,I'm going to do a letter of
explanation from me, which wouldbe a processor cert,
technically, is what that wouldbe.
So when we have a letter ofexplanation from the processor,
from the loan officer, it'sreally called a processor cert.
So I'm going to include aprocessor cert or possibly an
underwriting narrative.
(11:21):
Which is going to be a, a niceletter explaining to the
underwriter, uh, what are theextenuating circumstances,
connecting the dots for them,right?
Leaving nothing to chance,because why would you want to
leave a possibility to close aloan and get paid to chance?
That's like playing roulettewith the customer's, uh,
(11:42):
interest and with your, uh,commission as well.
That's something you want to do.
Another challenge would be anappraisal, right?
Um, I mean, we've already had atraining on reviewing appraisals
and, you know, completeness andall the categories of the
appraisal.
But one thing that I wanted totouch base, base on here is as
(12:06):
is versus subject to repairs,right?
Now be aware now on thefollowing, and I just was
discussing with an MLO thismorning, this scenario.
Where you have an appraisal thatcomes in and it's as is, as is,
is good, right?
When it's as is, that meanssupposedly there's nothing
(12:28):
wrong.
With the property.
The appraiser hasn't identifiedany issues with the, uh, with
the appraisal, any conditionrelated issues usually is what
we're talking about with theappraisal, but then, you know,
there's photos in thatappraisal, right?
And the appraiser, sometimesthis is what they do.
(12:48):
They don't want to like putsubject to repairs for an item,
but they'll put a picture.
Of the item that they had doubtson, uh, and in this particular
case, um, I was discussing withour MLO this morning.
It was a ceiling inside theproperty that had damage.
It looks like somebody's footwent through, uh, somebody was
(13:10):
walking around an attic on aproperty.
They were stepping on thetrusses, maybe misstep and went
through the ceiling and therewas sort of like damage to the
drywall.
In the ceiling in one of therooms.
And even though the appraisermarked the appraisal report as
is, meaning, you know, noissues, the photo was there, the
(13:34):
underwriter reviewed the photo.
And the underwriter said, Hey,guess what?
Um, this is now subject to, Ineed to know why is that hole
there?
Why is that damaging the ceilingthere?
Is that damage due to a roofleak?
What's going on.
And the underwriter basicallyswitched, uh, the appraisal in
(13:57):
all.
Reality to a subject to askingfor reinspection by the
appraiser to document that therereally isn't a roof leak.
Now, how's the appraiser reallygoing to determine that?
Right?
So now you're going to have toget some collaboration, um, and
address the issue, possibly tellthe seller, Hey, I think you
(14:18):
should repair that.
I think we may need to bring aroof inspector back out here and
just document that the roof isnot leaking, provide that roof
inspection to the appraiser, andthen have the appraiser go back
out to the property, take thephoto and say, yep, this was due
to somebody stepped through theroof.
(14:39):
It's it has been repaired.
I received an inspection from a,you know, certified roof company
stating that and and again, Iwould have a roofing company go
out there and provide thisinspection or an inspector that,
you know, is aware that all youneed them to do is just state
(15:00):
that that.
Section there is not leaking andthen the appraiser can go out,
take the photo of the of therepaired area document.
Yep.
It's not leaking.
I got an inspection stating.
It's not leaking, send that backto underwriting and then you
should be good to go.
But the MLOs have to be awarewhen they're looking at the
appraisal, you know, most peoplejust stop at the 1st or the 2nd
(15:24):
page where the or the 3rd page 1of the, you know, it's usually
the 2nd or 3rd page with thevalue is.
Yep.
Right.
Um, and they stop right there.
Oh, yep.
I got my value.
It says as is I'm good to go.
They don't look at the photosand realize, hey, wait a minute
that this may this may presentan issue because we've had that
issue come up, for example, withrotted wood.
Right.
(15:45):
On the facial boards, right?
They, they take pictures of theexterior of the property.
They don't document.
Hey, this is subject to becauseyou got a lot of facial boards,
but the underwriter is lookingat those photos with a
magnifying glass.
I think they're looking at thosephotos with an electron
microscope, right?
They see it.
Now, all of a sudden, they hityou with the reinspection
(16:05):
requirement and you've got to dothe, you know, the seller has to
do the repairs, so forth and soon.
So be aware.
Okay.
Uh, what as is versus subject torepairs means and how it could
actually turn into a subject torepairs appraisal because of
stuff like that.
Usually photos, uh, title andother, uh, underwriting
(16:26):
challenge because you could haveundisclosed liens or undisclosed
liabilities that come up whenthe title report comes back.
So you got to make sure that youreview the title report.
Don't just.
You know, download the emailfrom title.
uploaded, you know, to, to yourconditions for your processor to
(16:51):
submit to underwriting.
I mean, the processor shouldlook at it as well, but it is
the MLO's duty, first andforemost, to review the title
work and make sure Review allthe schedules, right?
Uh, Schedule A, Schedule B, B1,B2.
Look at all those, read everysingle line and make sure that
there isn't something like allof a sudden you got a 110, 000
(17:15):
IRS lien against the, againstthe, uh, borrower that wasn't
known.
Or conversely, a 110, 000 IRSlean against the seller if it's
a purchase and, uh, now theseller, you know, didn't
disclose that.
Now the seller may not be ableto close or they may have to do,
you know, jump over throughhoops of fire to be able to get
(17:38):
whatever they need to get fromthe IRS just to be able to close
the deal.
So do read the complete titlereport and be on the lookout for
any type of undisclosedsituations that could affect
this.
Thanks.
Uh, credit and income, obviouslytwo big challenges.
I'm giving them the next slidebecause it's so important
(18:00):
because I want to expand on thata little bit.
So I'm going to touch, uh, onthat on the next slide.
Uh, seasoning on title.
Now that's another big challengethere, right?
Now what do we mean by seasoningon title?
Means how long the borrower Inthis case, let's say if it's a
refi, we're talking about howlong the borrower has been
(18:23):
untitled.
If it's a purchase, we'retalking about how long the
seller has been untitled.
And you wonder, you know, let'stouch base on the seller because
you wonder, wait, but why do Ihave to worry about how long the
untitled?
Has been on title.
I mean, he's selling theproperty, right?
Well, it's very importantbecause there's a couple of loan
(18:45):
types that specifically, uh, putrestrictions on the seller.
Uh, the first one would be anFHA deal.
I think FHA has the 90 day rulewhere, um, if a seller is
reselling a property, you know,they purchase a property.
They, maybe they rehabbed it,maybe they didn't, but they
(19:05):
purchased a property and nowthey're selling it.
In this type of a scenario, ifit's an FHA purchase, right, the
seller cannot, uh, and theborrower, if it's an FHA deal,
cannot get into that contractuntil the 91st day after the
seller came on title.
(19:27):
So if they bought the titletoday, I mean, if they, if they
were, if they purchase aproperty today.
And today was the executed dayon the deed, right?
They would not be able to enterinto a purchase agreement to
sell that property to an FHAborrower until the 91st day
(19:50):
after today, right?
You got it.
So they buy it, they rehab it.
And 45 days later, they get intocontract with an FHA borrower.
Guess what?
When that goes underwriting,They're going to deny the file.
They're going to say, sorry, youcan't, you can't do it because
this is this seller just boughtthe property 45 days ago and
(20:11):
this is an FHA deal and youcan't get into contract until 91
days have passed after theseller, uh, was put on title,
right?
Which would be the day that theyhad the warranty be signed over
to them.
Right?
So be aware that's an FHA deal.
Um, okay.
Non QM also super important,right?
(20:33):
Uh, a lot of non QM, uh,guidelines.
And now again, a non QM, youcannot generalize anything.
Uh, non QM deals are allspecific.
To that particular lender orinvestor who the loan is being
submitted to.
So you have to then review andI'm getting a little bit ahead
of myself because that's my nextone below but you got to review
(20:57):
the guidelines to see whatseasoning on title requirements
there are for that on thoseparticular guidelines because we
have some that are veryrestrictive that say on a non qm
sale if the seller is resellingthe property.
Um, in less than 12 months andwhenever a seller is reselling a
(21:17):
property in less than 12 monthsof ownership, that's always
considered a flip, right?
Less than 12 months ofownership, always considered a
flip.
And in this case, we have someguidelines that are so
restrictive that say, if it's,if it's 12 months, if 12 months
have not elapsed, uh, on thatdeal.
Your appraised value will belimited to purchase price plus
(21:42):
renovations.
So that could be a real bigsituation because you had the
property, uh, the properties onthe contract for 350, 000, but
maybe the seller bought theproperty for 200, 000 and put
75, 000 into it, right?
The ARV after repaired valuecould definitely be 350, 000.
(22:03):
But that's not the case.
The case is not that that's notthe market value.
The case is that that particularguidelines is wants to be
conservative and is going totell you we're going to go with
the lower of the market value orpurchase price plus renovations.
So definitely now I hope thatopens your eyes to when you're
(22:25):
getting those purchases.
And it's non QM, and you betterlook at when the seller bought
the property, and if more than12 months have passed since they
bought the property, because ifnot, then you have a flip.
And then other scenarios, uh,when you have a flip, then, you
know, other less restrictiveguidelines, as an example, could
(22:47):
say, if it's been zero to 90days, and it's been, let's say,
more than 20%, Increase in thevalue.
You may have to get a secondvaluation method or a second
appraisal.
Others may say it's, you know,91 to, you know, anywhere from 0
to 180 days.
You need a secondary valueevaluation method, usually a
(23:11):
second appraisal.
So it's things like that thatyou have to be aware of.
On a, on a purchase when it'sseasoning on title, and then we
go to a refi, you know, that'sthe more common scenario
seasoning on title, and this istends to be more for non QM
deals where they may require acertain number of months before
(23:35):
on a cash out refi usually isthe case, but sometimes some of
them state this for a rate andterm as well.
Um, the same conduit that talksabout the 12 month flipping is
also the one that talks about,uh, rate and term and cash outs
are treated the same and youneed to have, uh, X number of
months seasoning untitled to beable to use the market value
(23:57):
versus purchase price plusrenovations or purchase price
plus closing costs if norenovations were done.
Right.
So again, typically, you know,we do this a lot with the DSCR
loans where we have most of theoptions, uh, state, you got to
have at least 6 months.
Right.
Seasoning on title to use theappraised value versus purchase
price plus renovations orpurchase price plus closing
(24:18):
costs.
We actually do have an optionthat allows us to have no
seasoning on title, but we mayhave to provide some type of
renovation work on it, or if theincrease is more than 20%.
Then they're probably going torequire a second appraisal, but
they'll still do the loan withzero month seasoning as long as
(24:38):
it appraises.
So there, we do have manyoptions, but you do have to be
aware that you have to reviewthe specific guidelines for this
issue.
Identify the issue up front.
You're, you're starting to getthe picture here, right?
A lot of the issues should beidentified up front.
So your loan is on the correcttrajectory.
Uh, property.
is another challenge, right?
(25:00):
You have to determine what arethe eligible and ineligible
property types and what would beconsidered non conforming uses.
Notice here I have inparentheses ADUs, right?
Accessory Dwelling Units, Ithink that's what ADU stands
for.
That's like a, an apartmentthat, you know, a separate, uh,
little rental.
(25:21):
I mean, mother in law suites,they, you know, they, they would
call them in the past, uh,efficiencies is what we call
them here in South Florida,where basically somebody has
converted a part of the house,like the garage into a rental
unit, maybe, uh, a bedroom thathad its own bathroom and
separate entry exit door into arental unit, or maybe even added
(25:42):
a, a detached separate a littlecottage or whatever rental unit
that would be an ADU.
So then you got to review theproperty, you got to review the
guidelines, uh, whether you'regoing agency and then reviewing
the selling guides or reviewingactual guidelines for non QM and
see how they treat ADUs.
(26:05):
For this example, or any othernonconforming uses and see what
they actually consider eligibleversus ineligible properties for
that program type.
You would be surprised what's onthere.
And if, for example, an issuethat happens with the 80 uses,
you have a property withmultiple 80 use now that may or
(26:26):
may not be allowed by localzoning, which is some of the
guidelines state.
We'll accept it if it was donein a workmanlike manner.
Others state, yeah, we'll acceptit if local zoning says it's
acceptable.
Right?
So you really got to review theguidelines and see who's going
to accept what.
Because remember, when we'restructuring these deals, it's
(26:47):
not just about the rate and thecost on the rate, but it's about
everything else.
You know, does the propertyreally fit what we're trying to
do?
Assets is another category,right?
And specifically sourcing.
and seasoning of the funds aswell as gift funds, right?
(27:09):
Um, if they just deposited thatmoney in there, you, you're
looking at the bank statement,look at the bank statement and
ask them, Hey, you got some bigdeposits here.
Where'd these come from?
Right.
And if they say, yeah, my mothergave me an 8, 000 gift, but they
gave it to them cash, Right, asopposed to a wire transfer or a
(27:31):
check, you know, you're going tohave an issue there and then you
may have to try to search.
For a conduit that does notsource the funds or maybe does
not season, does not require thefunds to be seasoned.
We do have conduits, mainly thisis going to be more for, uh, in
the non QM side and usually morefor the investment properties.
(27:51):
Where all you got to do is justshow the money in the bank.
No, no sourcing of the deposits,no seasoning required.
And then we have others that sayyou need two months of sourcing
and seasoning.
You know, 2 months of seasoningfor any large deposits.
So again, it's all going to varyon where you're planning on
submitting the loan.
(28:12):
Now, fraud, another importantcategory there.
I mean, that's, uh, we have ourfraud guard report.
I mean, you're MLO reviewing thedocumentation up front, right?
Remember, you're the initialunderwriter.
You're like the pre underwriteron the file.
You're the quality control onthe file.
(28:33):
And it's your job to identify, Imean, this is not your sole job,
but one of your duties is if youspot inconsistencies in the data
or inconsistencies in thedocumentation, do not pass the
buck.
And expect that it's theprocessor's job to bring it up
(28:55):
or the underwriter's job tobring it up.
No, you are submitting the loanapplication.
So if you knowingly submit, uh,these documents, not that you
committed the fraud, but youlooked at them, you knew they
were probably not legitimate,but you didn't put a hard stop
to the file.
(29:16):
Okay.
You're, you're, you know, the,when the regulators come to, uh,
review and inspect thisscenario, you are the first
person that they're going to,uh, approach regarding the
fraudulent documentation to seeif you are in collusion with the
borrower.
And yeah, you can be proven thatyou were not in collusion with
the borrower, but did not doyour job to put a hard stop to
(29:38):
the file.
And there could berepercussions, uh, to your
license, uh, or at least minimumof fines.
So now we get to guidelinesreviews, right?
You know, we're all aboutguidelines here at the Mortgage
Calculator.
So you, you know, it's going tobe a difference if it's an
(29:59):
agency loan versus non QM.
Agency, and by agency we meanconventional FHA, USDA, VA.
Has automated underwriting andhas homogeneous, uh, guidelines
and selling guys, meaningthey're all the same FHA selling
guide is FHA USDA is USDA and soforth, but be aware that there,
(30:21):
like I mentioned earlier, theremay be overlays by the investor
or lender that changes thingslike on an FHA deal, FHA really
doesn't have a minimum creditscore, but.
All of the lenders and investorsput different minimum credit
scores.
Typically the minimum you'regoing to find anywhere it's 500,
(30:41):
but then you got a lot of them,you know, won't go below 580 and
then you've got others thatwon't go below 620 and some that
even don't even want to go below640.
So again, those are differentoverlays and you have to be
aware of that when you're goingto submit a file.
Now in our pricing engine,typically it filters that out,
but still it's a, you know, yourjob.
(31:05):
To verify that information,please do be aware that a U.
S.
findings automated underwritingfindings determine the document
requirements.
and the LTV and DTI limits foragency loans.
And then also be aware that nonQM is always manually
(31:26):
underwritten, right?
There is no DU or LP applicablefor non QM and that the
guidelines for all non QMproducts are specific to the
investor.
So every now and then I get aquestion from an MLO.
For a DSCR loan, can we do XYZ?
(31:46):
And I basically got a reply.
Well, I need more information.
Who's the investor that you'recontemplating submitting this
loan to?
And can you share the guidelinesso I can review them and have
you reviewed them and can youshare them so I can review them
and give you an answer?
Because we cannot generalize anyanswers for non QM because All
(32:11):
of the guidelines are specificto the exact investor that the
loan is being submitted to.
So, cannot make any assumptions.
All DSCR loans are not createdequal.
The same as all bank statementloans, especially, are not
created equal.
Some allow overdrafts withexplanations on bank statement
loans without limit.
(32:32):
And others, if you do more thanthree in a 12 month period,
automatically deny you.
Right.
Two very different scenariosthere.
So let's talk about in our lastslide here, credit and income,
or should I say income andcredit.
First and foremost, determinethe correct income type that's
(32:53):
applicable for the loan.
Going back to the file that Ireviewed yesterday where they
thought it was going to be aDSCR, but after I got on the
phone, uh, with the borrower,because I had some questions,
turns out the borrower had verygood income and we could
actually go full dock with theborrower, uh, and get them a
(33:15):
better rate and a better productand actually a more compliant
rate.
lower cost than what was tryingto be structured.
So we're, you know, puttingtogether a deal that's going to
be able to close.
So you got to determine, right,is this going to be a full doc
borrower or is it going to be analt doc borrower, which would be
our bank statement option or aprofit and loss option, both of
(33:38):
those that are for self employedborrowers only.
Or is it going to be an assetutilization loan where they have
a lot of money in differentaccounts, stocks, bonds,
checking, savings, IRA, 401ks.
We could use those.
Or is it going to be a debtservice coverage ratio loan,
DSCR, where we're going toqualify the borrower based on
(34:01):
the gross rental income of theproperty.
So very important.
To note, very important to noteagain on these, you got to
review the guidelines for eachone to see which is, which is
the most applicable one.
Just because the customer wantsto apply for a certain loan type
does not mean that is the loantype that is best for them.
(34:24):
Uh, that is our job as thelicensee to scour the
guidelines, properly review allthe information, and then put
the loan in the correct place.
income type.
Definitely, we want to reviewfor potential issues, right?
Self employed borrowers,especially, how long have they
been in business?
(34:46):
Are they actually self employed?
I mean, we've been going overthe different trainings lately
on analyzing self employedborrower income.
We've gone over all thedifferent business structures
and all the differentrequirements to actually make a
borrower be considered selfemployed borrower.
And one of the things that Iwanted to note in this one.
(35:06):
Is two scenarios.
The first scenario would be aborrower that owns the business,
but pays himself with pay stubsand W 2s.
And then applies not as a selfemployed borrower, right?
Because the application says,you know, are you an owner of
the, you know, are you selfemployed?
Do you have a percentage ofownership in the business?
(35:27):
But they think, no, I'm gettinga W 2.
I'm getting pay stubs.
I am an employee of thebusiness.
Well, you are not an employee ofthe business that you own, you
know, you're just distributingyour income to you in different
ways.
One way to distribute income toyourself when you own a business
is through W 2 income.
(35:47):
Another way is just to dodistributions.
Um, which is going to bedifferent, right?
It's going to be a K 1 asopposed to a W 2, but my point
here is that W 2, that borrowerthat has W 2s, if they own at
least 25 percent of thatbusiness, if it's a S Corp or a
partnership or an LLC, forexample, they're going to be
(36:10):
considered self employed.
The only one that's not, notgoing to be considered self
employed in a scenario wherethey have a percentage of
ownership in the stock of thebusiness.
is when the business structureis a C Corp.
With a C Corp, the borrower hasto own 100 percent of the stock
(36:30):
of the C Corp to be consideredself employed.
They never own the C Corp, theyown the stock of the C Corp.
So the only way that you can,uh, credit them for income or
hit them for losses from the CCorp is if they are actually
self employed.
100 percent owner of the C Corp,right?
So other than that, any otherstructure, 25 percent or more
(36:54):
ownership in the business meansthat you are self employed.
Now, true W 2 employees,obviously what we got to worry
about there is going to bevariable income.
Now, let me explain anybodywho's not on salary.
They are hourly.
Hourly can be consideredvariable income as well, which
(37:15):
may vary from year to year.
Uh, and if you have a decline inincome from a previous year to
now, that could be an issue,right?
You know, so you have yourhourly people, but then the more
obvious variable income types tobe aware of is when they also
receive commission when theyreceive overtime.
(37:38):
Okay.
Or when they receive bonus and Ithrow in here, this is not
variable income, but I alsothrow in here, complicated pay
stubs, like a nurse, right?
How many people get those nursepay stubs with like 10 different
income categories and can't makeheads or tails of what is a.
Weekend differential, nighttimedifferential, holiday
(37:59):
differential, you know, you gotall these things there, but the
reason I have all of thesegrouped together in the W 2
employee category is becausethen the solution for this is
usually a written verificationof employment, a W V E.
Oh, right.
That's what you would requestfrom the employer and maybe the
(38:23):
employer uses the work numbers.
So you just have to figure thatpart out.
Um, but a written verificationof employment is the document
that's going to clarify thissituation to be able to properly
document commission over timebonuses and to properly break
down the income for a nurse, forexample, because maybe in the,
(38:43):
in the, uh, WVOE, they group allof those different differentials
into base income.
So now it's cool now, right?
Because now you know what thebase income is, plus the
overtime and any bonuses as maybe applicable.
And another situation to beconcerned about is employment
(39:05):
gaps.
Look at the findings in your, inyour AUS when it covers
employment gaps.
Usually they talk about morethan 30 days.
You got to provide extradocumentation and a non qm is
usually going to follow the samerule.
You don't have, uh, AUS, but youknow that there's an employment
gap of more than 30 days.
Make sure you get someadditional documentation,
(39:27):
letters of explanation, whathappened, why it was, and make
sure that you don't have anyissues, uh, with your employment
gaps causing, uh, the loan to bedenied.
And finally, talking here aboutcredit.
I want to make everybody awareand remind everybody that credit
score alone is not the onlyvariable considered.
(39:51):
Right.
I mean, I mean, we've hadscenarios lately where a file
has had to be pivoted to anotheroutlet because the borrower did
not meet the minimum trade linesrequired.
So be aware that I mean, creditscore is the litmus test.
In some cases, they may saycredit.
If you got 3 credit scores, wedon't worry about trade lines
(40:12):
when we're talking about non QM.
An agency is going to be alittle bit different, right?
Agency is going to be aboutautomated underwriting,
approving the borrower.
If it approves the borrower andyou don't have anything in the
findings that asks you foradditional trade lines, you're
good to go.
Non QM, totally different story.
You got to review the guidelinesand be aware.
(40:34):
Another thing to be aware of isrental or mortgage payment
history.
That may come into play,especially if there's issues
with the credit.
Underwriters may throwadditional conditions in there
about, uh, to verify 12 monthpayment history on rent.
Or verify the mortgage paymenthistory to make sure that
they're making on time paymentson their other properties.
(40:57):
Credit events do be aware of.
Credit events would be a shortsale, foreclosure, bankruptcy,
deed in lieu, to name four itemsthat could be, that are
considered credit events thatcould affect your deal.
And it's especially in non QM.
And then, If you had a firsttime homebuyer that could also
(41:19):
throw additional conditionsrequirements, for example, on a
DSCR loan, right?
If they're a first timehomebuyer, they may have to
provide, prove that they alsohave a primary housing expense.
Or else they may not beconsidered for that program.
Um, if they're a first timeinvestor, you could have
additional conditions also.
(41:39):
And like, for example, talkingabout investment properties,
this goes back to income.
Did you guys, you know, there'sa scenario where if it's an
investment property on aconventional loan, and the
borrower does not have a primaryhousing expense, guess what?
DU will tell, or LP will tellyou, you cannot use any rental
(42:02):
income generated by the propertyto help the borrower qualify.
They got to qualify solely ontheir income if they do not have
a primary housing expense andthey're trying to buy an
investment property for aconventional loan, right?
So that actually exists and thatactually every now and then.
Stings people and it only stingsthem if they don't review all
(42:25):
the findings and and see thatcondition in the findings.
So that concludes thepresentation part of the
training, but I wanted to see ifthere's any questions.
I, I do see a comment in therefrom the audience, uh, that
(42:48):
where it states that the GSEs.
Meaning Fannie Mae and FreddieMac and Jeannie Mae, that's the
one for FHA and, uh, VA, uh,have really cracked down on
variable income and thecalculations and remains one of
the highest issues audited inQCs as well.
It causes known salabilityissues, right?
(43:09):
So you want to make sure whenyou do have your variable income
on a file that, you know, youdot your I's.
Cross your T's and make sure youget that written verification of
employment to properly and fullydocument that variable income.
You don't want to have any postclosing audit come back at you
(43:30):
where they're asking you forthis type of information.
Uh, so, um, any questions outthere?
You gotta have some questions.
This is your moment to ask mequestions, questions you may
have in general on files you maybe working on income now that
(43:51):
you've been provided thisinformation.
Well, I'll give it anotherminute to see if anyone can come
up with any questions.
But I do appreciate all of youbeing present today for our
training.
All right, so I do have aquestion.
(44:11):
Uh, let me see if that questiongets put up for me for, for
review.
No.
Okay.
I'm going to read it.
The question is, uh, we have aborrower that has W 2 income,
works as a realtor and MLO, alsohaving more than 25 percent
interest in a family owned LLC.
Will he be considered a selfemployed and what are the most
(44:34):
critical underwriting?
Well, uh I mean, I would need alittle bit more information here
because we don't know if thisfamily owned LLC is the LLC that
is the employer for them as anMLO and is the LLC, uh, for the
employer for them as a realtor,but I will state, uh, real
(44:55):
estate income is paid as a 1099.
Usually, if you're a realtor,you don't get a W 2.
You get a 1099.
So you would be, your realestate income would definitely
be considered, uh, selfemployment income.
Um, MLO income is usually paidwith a W 2.
And you would be considered anemployee.
(45:18):
of the company where you haveyour license.
Uh, so that part would beemployee, but it's probably
going to, but it's commissionincome.
So, you know, you're going toneed that written verification
of employment usually todocument the commission.
The family LLC part, that ismultiple issues there being
(45:39):
presented.
A, If you have a 25 percentinterest or more in an LLC
that's active, you are, you areself employed.
But above and beyond that, Imean, the fact that you're
saying family owned LLC, I mean,at that point, if you own it
with a couple other familymembers, that's just an LLC.
(46:01):
That's owned with multiplemembers.
The fact that you're 25 percentor greater, uh, owner of that
LLC makes you self employed.
However, um, not being LLC.
Let's just say that you areemployed by a family owned
business.
Let's say in a differentscenario, um, where they ask you
(46:25):
and the questions is you're, youknow, are you employed by
family?
And if you answer yes, thatkicks additional red flags and
additional requirements.
Like, did you know that in mostcases when you are employed by a
family member, they are notgoing to use the year to date
(46:46):
income that you are earning?
They're only going to use thepro, you know, your past two
years income.
They're going to ask for taxreturns.
And they're going to documentyour income based on that.
The reason for that is becausethey know that there may be
collusion between the borrowerand the family member to
(47:07):
increase the current year todate income by, hey, can you
just increase my pay because I'mgoing to buy a house?
And now all of a sudden the yearto date, you know, shows this
great income that doesn't reallyfall in line with what they
made.
In 2023 or 2022 because theybumped up the income just to
help'em qualify.
That's why they only when it's afamily owned, you know, when
(47:30):
you're employed by family,that's why they put those
restrictions.
So when you do have the borrowerthat is employed by a family
member, be aware of what therequirements will be or look at
the guidelines very closely tosee what they will be, because
you are going to have additionalrestrictions there, and your
income is.
May be different than what youoriginally were calculating if
(47:53):
you calculated in a normalmanner without taking this into
consideration that they areemployed by family.
So that's a great question.
Alright, I do not see anyadditional questions, so I do
appreciate everyone being hereand I will see you all next
Tuesday's training.
Have a great day.
Mhm.
Good morning or good afternoon,everyone.
Thank you for joining us fortoday's training.
Today we have another greattraining.
It seems like we've had somepretty, uh, good stuff the last
couple of training stuff that Ihope you will definitely be able
to use.
Uh, just last night I used the,um, uh, the one on, uh, properly
(00:23):
explaining the benefits of arefinance to, uh, to a borrower
and, uh, used, uh, all of theguidance.
that was provided on thattraining to, uh, basically, uh,
put the borrower at ease and letthe borrower know that we were
looking out for her bestinterest, uh, overall.
(00:47):
And that's what got us the deal.
We were competing with multipleother, uh, lenders.
For that deal.
But she felt that, uh, myprofessionalism and combined
with my sincerity to assist herwith the refinance, uh, is what
got us to deal.
She felt like, um, I was notjust treating her like another
(01:10):
commission, right?
We were actually concerned, uh,because I really honed in on,
um, what was her objective andmaking sure that the refinance.
that she wanted to do really mether objective.
So today's training is onunderstanding underwriting
(01:33):
challenges for loan officers,right?
This is a great one.
This is the one that's going toallow your file to get off on
the correct trajectory.
Right.
You don't want to assumeanything on a file.
As a matter of fact, on the onethat I, um, did yesterday was
originally started by anotherMLO.
(01:54):
Uh, the file has a DSCR rate,uh, DSCR rate and term refi.
But in the end, what we aredisclosing is a non QM full doc
loan getting the customer, uh, Ibelieve almost a half a percent
(02:15):
lower interest rate at twopoints lower cost, right?
So that, that actually ties intoThe training we're going to do
today on understandingunderwriting challenges, because
if you understand what thechallenges are in the loan and
the proper way to meet thosechallenges, you can structure
(02:35):
your loan correctly.
And, um, not only structure itcorrectly, but help the customer
meet their goals.
The objective.
So let's get right in on it herebecause this is the one that's
going to get you the deals.
Make sure that your deals close.
So, um, what exactly do we meanby loan underwriting?
(02:57):
Right?
What is underwriting actuallymean?
Well, excuse me.
Underwriting is a process ofdetermining and quantifying the
risk on a file by reviewing thefile's income.
Assets, debt, and propertydetails to ensure eligibility
according to a set guidelines.
(03:21):
And now, you know, we're allabout guidelines here at the
Mortgage Calculator, so I'mgonna touch on guidelines a
little bit lower down this page,but let's talk about what are
the challenges that can be met,that can be faced, and um,
different ways that we can meetthem.
Right.
So most of the issues usuallycould revolve around inaccurate.
(03:44):
incomplete or missing data.
So let's touch on the differentcomponents of the loan file that
the underwriter is going toreview, right?
Obviously the first componentand underwriting, and remember
you as the MLO, I sayunderwriter here, right?
But in essence, you are theinitial underwriter on a file.
(04:07):
When you're pre approving theborrower, uh, taking that loan
application, because remember atthe mortgage calculator, when we
pre approve a borrower, we'recompleting a loan application.
If it's a TBD pre approval for apurchase, we're not going to
have a property.
But if it's a refi, we alreadyhave a property.
(04:30):
So components that we are goingto be looking at First one would
be the borrower, right?
So you definitely want to makesure that you know what type of
borrower you have.
What borrower type are youdealing with?
So that then you could reviewall of the applicable guidelines
(04:51):
for eligible or ineligibleborrower types.
and eligible or ineligibleoccupancy by a particular
borrower type for a particulartransaction type, right?
So, um, just note, right?
I mean, if it's a four unitproperty and it's primary, or if
(05:14):
it's a Um, you know, I canborrow whatever borrower type
you have, um, to give anexample, I, I was helping a loan
officer structure a file theother day, and this loan officer
thought that just because theforeign national, this is a
foreign national borrower, buthe thought because a foreign
(05:34):
national borrower had an ITIN.
Which is an international tax IDnumber.
That is just a document whereyou're given a number so that
you can file tax returns.
Typically that's a number givento non U.
S.
residents that do not havesocial security numbers so that
(05:55):
they can file tax returns for.
For example, properties, theymay have properties in an LLC
and they may need to file theirincome and expense report with
the government, right?
With the U S government thatdoes require you to do so.
So they're not working in the US right.
They just have an investmentproperty here.
They have to file a tax return.
(06:15):
And the only way to file a taxreturn is with an ITIN.
So most people saying ITIN.
number, but the N in ITIN isactually the number.
It's an ITIN document,international tax, uh, excuse
me, individual taxpayeridentification number.
So, um, after reviewingadditional documentation, the
(06:37):
borrower provided like theirforeign passport and their visa
that they have were granted tobe able to come to the U S it
was determined that they, theborrower was not an ITIN
borrower, but was actually aforeign national borrower.
And guess what?
The foreign national loan had alower interest rate and lower
(07:01):
cost than the ITIN borrowerloan.
Uh, so we ended up, uh,structuring that deal and
disclosing it to a very happyborrower, but that's just one
example where incorrectlycategorizing a borrower Could
get your loan off on theincorrect trajectory.
(07:21):
And then when it gets tounderwriting.
You're going to get denied orthe loan is going to get
suspended and they're going tohit you with like a whole bunch
of conditions which really wereunnecessary and you were just
conditioned for that because youstarted the loan off with an
incorrect borrowercategorization.
(07:41):
Another challenge is going to bewith a loan originator that
submits an incomplete file.
Now that's the biggestchallenge, right?
You're submitting.
A full doc file, for example,and you don't have all your
income documentation in line.
Maybe now at the mortgagecalculator, we try to screen the
files to make sure that files donot get submitted to
(08:03):
underwriting with incompletedocumentation.
Um, but those things can happenwhere the file gets reviewed.
And when the underwriter looksdeep into the file, they find
out that there's a lot of stuffmissing, or it could be that the
loan originator Did not properlyreview the applicable guidelines
(08:25):
for the product, right?
Maybe it was an agency file.
And they just assumed whateverthey assumed and didn't review,
didn't review the overlays thatthat particular investor or
lender has on their product, onthat particular product.
And be aware, overlays are notchanges to the product.
(08:49):
To the guideline overlays arejust additional restrictions
that the lender or investor puton the product that they are
buying, right?
They buy those loans and they'regoing to put certain conditions
on the loans that they're goingto buy.
You, you, for example, if it's aconventional loan, um, using
(09:12):
Fannie Mae guidelines, yousubmitted it to automated
underwriting to be you then, buta lender X, Y, Z.
May have an additional overlaythat, uh, the credit score is
below a certain amount.
They require, uh, additionalreserves or something like that,
right?
That's not going to be in theFannie Mae selling guide.
(09:34):
But that could be on thatparticular investors overlays on
loans that they're going to buy.
So again, loan originators haveto make sure that whatever file
you want submitted to under, youknow, you're going to submit,
have it, have it be as completeas possible.
And as we, as we go, Through theadditional challenges here in
this presentation, you are goingto understand what I mean by
(09:57):
reviewing it and making surethat you're submitting a
complete and accurate filebecause if not, you're just
shooting yourself in the foot.
You're going to get hit with alaundry list of conditions and
what could have been a cleanapproval.
Is all of a sudden going to be asuper complicated suspense,
(10:17):
which means your file is notapproved.
They are asking you foradditional documentation to be
able to consider approving it.
It's borderline going to bedenied because you just confused
the heck out of the underwriter.
And they don't know how to makeheads or tails of your file
because there were probablymissing letters of explanation.
For extenuating circumstancesthat you wanted them to
(10:40):
consider.
Because remember the following.
Underwriters are not mindreaders, right?
I mean, I like to say that Ilike to provide letters of
explanation for a letter ofexplanation, right?
Which means Bara may beexplaining a scenario.
Providing some documentation.
I'm going to get their letter ofexplanation.
(11:00):
I'm going to get thedocumentation, and if it's not
as complete as I think it is,I'm going to do a letter of
explanation from me, which wouldbe a processor cert,
technically, is what that wouldbe.
So when we have a letter ofexplanation from the processor,
from the loan officer, it'sreally called a processor cert.
So I'm going to include aprocessor cert or possibly an
underwriting narrative.
(11:21):
Which is going to be a, a niceletter explaining to the
underwriter, uh, what are theextenuating circumstances,
connecting the dots for them,right?
Leaving nothing to chance,because why would you want to
leave a possibility to close aloan and get paid to chance?
That's like playing roulettewith the customer's, uh,
(11:42):
interest and with your, uh,commission as well.
That's something you want to do.
Another challenge would be anappraisal, right?
Um, I mean, we've already had atraining on reviewing appraisals
and, you know, completeness andall the categories of the
appraisal.
But one thing that I wanted totouch base, base on here is as
(12:06):
is versus subject to repairs,right?
Now be aware now on thefollowing, and I just was
discussing with an MLO thismorning, this scenario.
Where you have an appraisal thatcomes in and it's as is, as is,
is good, right?
When it's as is, that meanssupposedly there's nothing
(12:28):
wrong.
With the property.
The appraiser hasn't identifiedany issues with the, uh, with
the appraisal, any conditionrelated issues usually is what
we're talking about with theappraisal, but then, you know,
there's photos in thatappraisal, right?
And the appraiser, sometimesthis is what they do.
(12:48):
They don't want to like putsubject to repairs for an item,
but they'll put a picture.
Of the item that they had doubtson, uh, and in this particular
case, um, I was discussing withour MLO this morning.
It was a ceiling inside theproperty that had damage.
It looks like somebody's footwent through, uh, somebody was
(13:10):
walking around an attic on aproperty.
They were stepping on thetrusses, maybe misstep and went
through the ceiling and therewas sort of like damage to the
drywall.
In the ceiling in one of therooms.
And even though the appraisermarked the appraisal report as
is, meaning, you know, noissues, the photo was there, the
(13:34):
underwriter reviewed the photo.
And the underwriter said, Hey,guess what?
Um, this is now subject to, Ineed to know why is that hole
there?
Why is that damaging the ceilingthere?
Is that damage due to a roofleak?
What's going on.
And the underwriter basicallyswitched, uh, the appraisal in
(13:57):
all.
Reality to a subject to askingfor reinspection by the
appraiser to document that therereally isn't a roof leak.
Now, how's the appraiser reallygoing to determine that?
Right?
So now you're going to have toget some collaboration, um, and
address the issue, possibly tellthe seller, Hey, I think you
(14:18):
should repair that.
I think we may need to bring aroof inspector back out here and
just document that the roof isnot leaking, provide that roof
inspection to the appraiser, andthen have the appraiser go back
out to the property, take thephoto and say, yep, this was due
to somebody stepped through theroof.
(14:39):
It's it has been repaired.
I received an inspection from a,you know, certified roof company
stating that and and again, Iwould have a roofing company go
out there and provide thisinspection or an inspector that,
you know, is aware that all youneed them to do is just state
(15:00):
that that.
Section there is not leaking andthen the appraiser can go out,
take the photo of the of therepaired area document.
Yep.
It's not leaking.
I got an inspection stating.
It's not leaking, send that backto underwriting and then you
should be good to go.
But the MLOs have to be awarewhen they're looking at the
appraisal, you know, most peoplejust stop at the 1st or the 2nd
(15:24):
page where the or the 3rd page 1of the, you know, it's usually
the 2nd or 3rd page with thevalue is.
Yep.
Right.
Um, and they stop right there.
Oh, yep.
I got my value.
It says as is I'm good to go.
They don't look at the photosand realize, hey, wait a minute
that this may this may presentan issue because we've had that
issue come up, for example, withrotted wood.
Right.
(15:45):
On the facial boards, right?
They, they take pictures of theexterior of the property.
They don't document.
Hey, this is subject to becauseyou got a lot of facial boards,
but the underwriter is lookingat those photos with a
magnifying glass.
I think they're looking at thosephotos with an electron
microscope, right?
They see it.
Now, all of a sudden, they hityou with the reinspection
(16:05):
requirement and you've got to dothe, you know, the seller has to
do the repairs, so forth and soon.
So be aware.
Okay.
Uh, what as is versus subject torepairs means and how it could
actually turn into a subject torepairs appraisal because of
stuff like that.
Usually photos, uh, title andother, uh, underwriting
(16:26):
challenge because you could haveundisclosed liens or undisclosed
liabilities that come up whenthe title report comes back.
So you got to make sure that youreview the title report.
Don't just.
You know, download the emailfrom title.
uploaded, you know, to, to yourconditions for your processor to
(16:51):
submit to underwriting.
I mean, the processor shouldlook at it as well, but it is
the MLO's duty, first andforemost, to review the title
work and make sure Review allthe schedules, right?
Uh, Schedule A, Schedule B, B1,B2.
Look at all those, read everysingle line and make sure that
there isn't something like allof a sudden you got a 110, 000
(17:15):
IRS lien against the, againstthe, uh, borrower that wasn't
known.
Or conversely, a 110, 000 IRSlean against the seller if it's
a purchase and, uh, now theseller, you know, didn't
disclose that.
Now the seller may not be ableto close or they may have to do,
you know, jump over throughhoops of fire to be able to get
(17:38):
whatever they need to get fromthe IRS just to be able to close
the deal.
So do read the complete titlereport and be on the lookout for
any type of undisclosedsituations that could affect
this.
Thanks.
Uh, credit and income, obviouslytwo big challenges.
I'm giving them the next slidebecause it's so important
(18:00):
because I want to expand on thata little bit.
So I'm going to touch, uh, onthat on the next slide.
Uh, seasoning on title.
Now that's another big challengethere, right?
Now what do we mean by seasoningon title?
Means how long the borrower Inthis case, let's say if it's a
refi, we're talking about howlong the borrower has been
(18:23):
untitled.
If it's a purchase, we'retalking about how long the
seller has been untitled.
And you wonder, you know, let'stouch base on the seller because
you wonder, wait, but why do Ihave to worry about how long the
untitled?
Has been on title.
I mean, he's selling theproperty, right?
Well, it's very importantbecause there's a couple of loan
(18:45):
types that specifically, uh, putrestrictions on the seller.
Uh, the first one would be anFHA deal.
I think FHA has the 90 day rulewhere, um, if a seller is
reselling a property, you know,they purchase a property.
They, maybe they rehabbed it,maybe they didn't, but they
(19:05):
purchased a property and nowthey're selling it.
In this type of a scenario, ifit's an FHA purchase, right, the
seller cannot, uh, and theborrower, if it's an FHA deal,
cannot get into that contractuntil the 91st day after the
seller came on title.
(19:27):
So if they bought the titletoday, I mean, if they, if they
were, if they purchase aproperty today.
And today was the executed dayon the deed, right?
They would not be able to enterinto a purchase agreement to
sell that property to an FHAborrower until the 91st day
(19:50):
after today, right?
You got it.
So they buy it, they rehab it.
And 45 days later, they get intocontract with an FHA borrower.
Guess what?
When that goes underwriting,They're going to deny the file.
They're going to say, sorry, youcan't, you can't do it because
this is this seller just boughtthe property 45 days ago and
(20:11):
this is an FHA deal and youcan't get into contract until 91
days have passed after theseller, uh, was put on title,
right?
Which would be the day that theyhad the warranty be signed over
to them.
Right?
So be aware that's an FHA deal.
Um, okay.
Non QM also super important,right?
(20:33):
Uh, a lot of non QM, uh,guidelines.
And now again, a non QM, youcannot generalize anything.
Uh, non QM deals are allspecific.
To that particular lender orinvestor who the loan is being
submitted to.
So you have to then review andI'm getting a little bit ahead
of myself because that's my nextone below but you got to review
(20:57):
the guidelines to see whatseasoning on title requirements
there are for that on thoseparticular guidelines because we
have some that are veryrestrictive that say on a non qm
sale if the seller is resellingthe property.
Um, in less than 12 months andwhenever a seller is reselling a
(21:17):
property in less than 12 monthsof ownership, that's always
considered a flip, right?
Less than 12 months ofownership, always considered a
flip.
And in this case, we have someguidelines that are so
restrictive that say, if it's,if it's 12 months, if 12 months
have not elapsed, uh, on thatdeal.
Your appraised value will belimited to purchase price plus
(21:42):
renovations.
So that could be a real bigsituation because you had the
property, uh, the properties onthe contract for 350, 000, but
maybe the seller bought theproperty for 200, 000 and put
75, 000 into it, right?
The ARV after repaired valuecould definitely be 350, 000.
(22:03):
But that's not the case.
The case is not that that's notthe market value.
The case is that that particularguidelines is wants to be
conservative and is going totell you we're going to go with
the lower of the market value orpurchase price plus renovations.
So definitely now I hope thatopens your eyes to when you're
(22:25):
getting those purchases.
And it's non QM, and you betterlook at when the seller bought
the property, and if more than12 months have passed since they
bought the property, because ifnot, then you have a flip.
And then other scenarios, uh,when you have a flip, then, you
know, other less restrictiveguidelines, as an example, could
(22:47):
say, if it's been zero to 90days, and it's been, let's say,
more than 20%, Increase in thevalue.
You may have to get a secondvaluation method or a second
appraisal.
Others may say it's, you know,91 to, you know, anywhere from 0
to 180 days.
You need a secondary valueevaluation method, usually a
(23:11):
second appraisal.
So it's things like that thatyou have to be aware of.
On a, on a purchase when it'sseasoning on title, and then we
go to a refi, you know, that'sthe more common scenario
seasoning on title, and this istends to be more for non QM
deals where they may require acertain number of months before
(23:35):
on a cash out refi usually isthe case, but sometimes some of
them state this for a rate andterm as well.
Um, the same conduit that talksabout the 12 month flipping is
also the one that talks about,uh, rate and term and cash outs
are treated the same and youneed to have, uh, X number of
months seasoning untitled to beable to use the market value
(23:57):
versus purchase price plusrenovations or purchase price
plus closing costs if norenovations were done.
Right.
So again, typically, you know,we do this a lot with the DSCR
loans where we have most of theoptions, uh, state, you got to
have at least 6 months.
Right.
Seasoning on title to use theappraised value versus purchase
price plus renovations orpurchase price plus closing
(24:18):
costs.
We actually do have an optionthat allows us to have no
seasoning on title, but we mayhave to provide some type of
renovation work on it, or if theincrease is more than 20%.
Then they're probably going torequire a second appraisal, but
they'll still do the loan withzero month seasoning as long as
(24:38):
it appraises.
So there, we do have manyoptions, but you do have to be
aware that you have to reviewthe specific guidelines for this
issue.
Identify the issue up front.
You're, you're starting to getthe picture here, right?
A lot of the issues should beidentified up front.
So your loan is on the correcttrajectory.
Uh, property.
is another challenge, right?
(25:00):
You have to determine what arethe eligible and ineligible
property types and what would beconsidered non conforming uses.
Notice here I have inparentheses ADUs, right?
Accessory Dwelling Units, Ithink that's what ADU stands
for.
That's like a, an apartmentthat, you know, a separate, uh,
little rental.
(25:21):
I mean, mother in law suites,they, you know, they, they would
call them in the past, uh,efficiencies is what we call
them here in South Florida,where basically somebody has
converted a part of the house,like the garage into a rental
unit, maybe, uh, a bedroom thathad its own bathroom and
separate entry exit door into arental unit, or maybe even added
(25:42):
a, a detached separate a littlecottage or whatever rental unit
that would be an ADU.
So then you got to review theproperty, you got to review the
guidelines, uh, whether you'regoing agency and then reviewing
the selling guides or reviewingactual guidelines for non QM and
see how they treat ADUs.
(26:05):
For this example, or any othernonconforming uses and see what
they actually consider eligibleversus ineligible properties for
that program type.
You would be surprised what's onthere.
And if, for example, an issuethat happens with the 80 uses,
you have a property withmultiple 80 use now that may or
(26:26):
may not be allowed by localzoning, which is some of the
guidelines state.
We'll accept it if it was donein a workmanlike manner.
Others state, yeah, we'll acceptit if local zoning says it's
acceptable.
Right?
So you really got to review theguidelines and see who's going
to accept what.
Because remember, when we'restructuring these deals, it's
(26:47):
not just about the rate and thecost on the rate, but it's about
everything else.
You know, does the propertyreally fit what we're trying to
do?
Assets is another category,right?
And specifically sourcing.
and seasoning of the funds aswell as gift funds, right?
(27:09):
Um, if they just deposited thatmoney in there, you, you're
looking at the bank statement,look at the bank statement and
ask them, Hey, you got some bigdeposits here.
Where'd these come from?
Right.
And if they say, yeah, my mothergave me an 8, 000 gift, but they
gave it to them cash, Right, asopposed to a wire transfer or a
(27:31):
check, you know, you're going tohave an issue there and then you
may have to try to search.
For a conduit that does notsource the funds or maybe does
not season, does not require thefunds to be seasoned.
We do have conduits, mainly thisis going to be more for, uh, in
the non QM side and usually morefor the investment properties.
(27:51):
Where all you got to do is justshow the money in the bank.
No, no sourcing of the deposits,no seasoning required.
And then we have others that sayyou need two months of sourcing
and seasoning.
You know, 2 months of seasoningfor any large deposits.
So again, it's all going to varyon where you're planning on
submitting the loan.
(28:12):
Now, fraud, another importantcategory there.
I mean, that's, uh, we have ourfraud guard report.
I mean, you're MLO reviewing thedocumentation up front, right?
Remember, you're the initialunderwriter.
You're like the pre underwriteron the file.
You're the quality control onthe file.
(28:33):
And it's your job to identify, Imean, this is not your sole job,
but one of your duties is if youspot inconsistencies in the data
or inconsistencies in thedocumentation, do not pass the
buck.
And expect that it's theprocessor's job to bring it up
(28:55):
or the underwriter's job tobring it up.
No, you are submitting the loanapplication.
So if you knowingly submit, uh,these documents, not that you
committed the fraud, but youlooked at them, you knew they
were probably not legitimate,but you didn't put a hard stop
to the file.
(29:16):
Okay.
You're, you're, you know, the,when the regulators come to, uh,
review and inspect thisscenario, you are the first
person that they're going to,uh, approach regarding the
fraudulent documentation to seeif you are in collusion with the
borrower.
And yeah, you can be proven thatyou were not in collusion with
the borrower, but did not doyour job to put a hard stop to
(29:38):
the file.
And there could berepercussions, uh, to your
license, uh, or at least minimumof fines.
So now we get to guidelinesreviews, right?
You know, we're all aboutguidelines here at the Mortgage
Calculator.
So you, you know, it's going tobe a difference if it's an
(29:59):
agency loan versus non QM.
Agency, and by agency we meanconventional FHA, USDA, VA.
Has automated underwriting andhas homogeneous, uh, guidelines
and selling guys, meaningthey're all the same FHA selling
guide is FHA USDA is USDA and soforth, but be aware that there,
(30:21):
like I mentioned earlier, theremay be overlays by the investor
or lender that changes thingslike on an FHA deal, FHA really
doesn't have a minimum creditscore, but.
All of the lenders and investorsput different minimum credit
scores.
Typically the minimum you'regoing to find anywhere it's 500,
(30:41):
but then you got a lot of them,you know, won't go below 580 and
then you've got others thatwon't go below 620 and some that
even don't even want to go below640.
So again, those are differentoverlays and you have to be
aware of that when you're goingto submit a file.
Now in our pricing engine,typically it filters that out,
but still it's a, you know, yourjob.
(31:05):
To verify that information,please do be aware that a U.
S.
findings automated underwritingfindings determine the document
requirements.
and the LTV and DTI limits foragency loans.
And then also be aware that nonQM is always manually
(31:26):
underwritten, right?
There is no DU or LP applicablefor non QM and that the
guidelines for all non QMproducts are specific to the
investor.
So every now and then I get aquestion from an MLO.
For a DSCR loan, can we do XYZ?
(31:46):
And I basically got a reply.
Well, I need more information.
Who's the investor that you'recontemplating submitting this
loan to?
And can you share the guidelinesso I can review them and have
you reviewed them and can youshare them so I can review them
and give you an answer?
Because we cannot generalize anyanswers for non QM because All
(32:11):
of the guidelines are specificto the exact investor that the
loan is being submitted to.
So, cannot make any assumptions.
All DSCR loans are not createdequal.
The same as all bank statementloans, especially, are not
created equal.
Some allow overdrafts withexplanations on bank statement
loans without limit.
(32:32):
And others, if you do more thanthree in a 12 month period,
automatically deny you.
Right.
Two very different scenariosthere.
So let's talk about in our lastslide here, credit and income,
or should I say income andcredit.
First and foremost, determinethe correct income type that's
(32:53):
applicable for the loan.
Going back to the file that Ireviewed yesterday where they
thought it was going to be aDSCR, but after I got on the
phone, uh, with the borrower,because I had some questions,
turns out the borrower had verygood income and we could
actually go full dock with theborrower, uh, and get them a
(33:15):
better rate and a better productand actually a more compliant
rate.
lower cost than what was tryingto be structured.
So we're, you know, puttingtogether a deal that's going to
be able to close.
So you got to determine, right,is this going to be a full doc
borrower or is it going to be analt doc borrower, which would be
our bank statement option or aprofit and loss option, both of
(33:38):
those that are for self employedborrowers only.
Or is it going to be an assetutilization loan where they have
a lot of money in differentaccounts, stocks, bonds,
checking, savings, IRA, 401ks.
We could use those.
Or is it going to be a debtservice coverage ratio loan,
DSCR, where we're going toqualify the borrower based on
(34:01):
the gross rental income of theproperty.
So very important.
To note, very important to noteagain on these, you got to
review the guidelines for eachone to see which is, which is
the most applicable one.
Just because the customer wantsto apply for a certain loan type
does not mean that is the loantype that is best for them.
(34:24):
Uh, that is our job as thelicensee to scour the
guidelines, properly review allthe information, and then put
the loan in the correct place.
income type.
Definitely, we want to reviewfor potential issues, right?
Self employed borrowers,especially, how long have they
been in business?
(34:46):
Are they actually self employed?
I mean, we've been going overthe different trainings lately
on analyzing self employedborrower income.
We've gone over all thedifferent business structures
and all the differentrequirements to actually make a
borrower be considered selfemployed borrower.
And one of the things that Iwanted to note in this one.
(35:06):
Is two scenarios.
The first scenario would be aborrower that owns the business,
but pays himself with pay stubsand W 2s.
And then applies not as a selfemployed borrower, right?
Because the application says,you know, are you an owner of
the, you know, are you selfemployed?
Do you have a percentage ofownership in the business?
(35:27):
But they think, no, I'm gettinga W 2.
I'm getting pay stubs.
I am an employee of thebusiness.
Well, you are not an employee ofthe business that you own, you
know, you're just distributingyour income to you in different
ways.
One way to distribute income toyourself when you own a business
is through W 2 income.
(35:47):
Another way is just to dodistributions.
Um, which is going to bedifferent, right?
It's going to be a K 1 asopposed to a W 2, but my point
here is that W 2, that borrowerthat has W 2s, if they own at
least 25 percent of thatbusiness, if it's a S Corp or a
partnership or an LLC, forexample, they're going to be
(36:10):
considered self employed.
The only one that's not, notgoing to be considered self
employed in a scenario wherethey have a percentage of
ownership in the stock of thebusiness.
is when the business structureis a C Corp.
With a C Corp, the borrower hasto own 100 percent of the stock
(36:30):
of the C Corp to be consideredself employed.
They never own the C Corp, theyown the stock of the C Corp.
So the only way that you can,uh, credit them for income or
hit them for losses from the CCorp is if they are actually
self employed.
100 percent owner of the C Corp,right?
So other than that, any otherstructure, 25 percent or more
(36:54):
ownership in the business meansthat you are self employed.
Now, true W 2 employees,obviously what we got to worry
about there is going to bevariable income.
Now, let me explain anybodywho's not on salary.
They are hourly.
Hourly can be consideredvariable income as well, which
(37:15):
may vary from year to year.
Uh, and if you have a decline inincome from a previous year to
now, that could be an issue,right?
You know, so you have yourhourly people, but then the more
obvious variable income types tobe aware of is when they also
receive commission when theyreceive overtime.
(37:38):
Okay.
Or when they receive bonus and Ithrow in here, this is not
variable income, but I alsothrow in here, complicated pay
stubs, like a nurse, right?
How many people get those nursepay stubs with like 10 different
income categories and can't makeheads or tails of what is a.
Weekend differential, nighttimedifferential, holiday
(37:59):
differential, you know, you gotall these things there, but the
reason I have all of thesegrouped together in the W 2
employee category is becausethen the solution for this is
usually a written verificationof employment, a W V E.
Oh, right.
That's what you would requestfrom the employer and maybe the
(38:23):
employer uses the work numbers.
So you just have to figure thatpart out.
Um, but a written verificationof employment is the document
that's going to clarify thissituation to be able to properly
document commission over timebonuses and to properly break
down the income for a nurse, forexample, because maybe in the,
(38:43):
in the, uh, WVOE, they group allof those different differentials
into base income.
So now it's cool now, right?
Because now you know what thebase income is, plus the
overtime and any bonuses as maybe applicable.
And another situation to beconcerned about is employment
(39:05):
gaps.
Look at the findings in your, inyour AUS when it covers
employment gaps.
Usually they talk about morethan 30 days.
You got to provide extradocumentation and a non qm is
usually going to follow the samerule.
You don't have, uh, AUS, but youknow that there's an employment
gap of more than 30 days.
Make sure you get someadditional documentation,
(39:27):
letters of explanation, whathappened, why it was, and make
sure that you don't have anyissues, uh, with your employment
gaps causing, uh, the loan to bedenied.
And finally, talking here aboutcredit.
I want to make everybody awareand remind everybody that credit
score alone is not the onlyvariable considered.
(39:51):
Right.
I mean, I mean, we've hadscenarios lately where a file
has had to be pivoted to anotheroutlet because the borrower did
not meet the minimum trade linesrequired.
So be aware that I mean, creditscore is the litmus test.
In some cases, they may saycredit.
If you got 3 credit scores, wedon't worry about trade lines
(40:12):
when we're talking about non QM.
An agency is going to be alittle bit different, right?
Agency is going to be aboutautomated underwriting,
approving the borrower.
If it approves the borrower andyou don't have anything in the
findings that asks you foradditional trade lines, you're
good to go.
Non QM, totally different story.
You got to review the guidelinesand be aware.
(40:34):
Another thing to be aware of isrental or mortgage payment
history.
That may come into play,especially if there's issues
with the credit.
Underwriters may throwadditional conditions in there
about, uh, to verify 12 monthpayment history on rent.
Or verify the mortgage paymenthistory to make sure that
they're making on time paymentson their other properties.
(40:57):
Credit events do be aware of.
Credit events would be a shortsale, foreclosure, bankruptcy,
deed in lieu, to name four itemsthat could be, that are
considered credit events thatcould affect your deal.
And it's especially in non QM.
And then, If you had a firsttime homebuyer that could also
(41:19):
throw additional conditionsrequirements, for example, on a
DSCR loan, right?
If they're a first timehomebuyer, they may have to
provide, prove that they alsohave a primary housing expense.
Or else they may not beconsidered for that program.
Um, if they're a first timeinvestor, you could have
additional conditions also.
(41:39):
And like, for example, talkingabout investment properties,
this goes back to income.
Did you guys, you know, there'sa scenario where if it's an
investment property on aconventional loan, and the
borrower does not have a primaryhousing expense, guess what?
DU will tell, or LP will tellyou, you cannot use any rental
(42:02):
income generated by the propertyto help the borrower qualify.
They got to qualify solely ontheir income if they do not have
a primary housing expense andthey're trying to buy an
investment property for aconventional loan, right?
So that actually exists and thatactually every now and then.
Stings people and it only stingsthem if they don't review all
(42:25):
the findings and and see thatcondition in the findings.
So that concludes thepresentation part of the
training, but I wanted to see ifthere's any questions.
I, I do see a comment in therefrom the audience, uh, that
(42:48):
where it states that the GSEs.
Meaning Fannie Mae and FreddieMac and Jeannie Mae, that's the
one for FHA and, uh, VA, uh,have really cracked down on
variable income and thecalculations and remains one of
the highest issues audited inQCs as well.
It causes known salabilityissues, right?
(43:09):
So you want to make sure whenyou do have your variable income
on a file that, you know, youdot your I's.
Cross your T's and make sure youget that written verification of
employment to properly and fullydocument that variable income.
You don't want to have any postclosing audit come back at you
(43:30):
where they're asking you forthis type of information.
Uh, so, um, any questions outthere?
You gotta have some questions.
This is your moment to ask mequestions, questions you may
have in general on files you maybe working on income now that
(43:51):
you've been provided thisinformation.
Well, I'll give it anotherminute to see if anyone can come
up with any questions.
But I do appreciate all of youbeing present today for our
training.
All right, so I do have aquestion.
(44:11):
Uh, let me see if that questiongets put up for me for, for
review.
No.
Okay.
I'm going to read it.
The question is, uh, we have aborrower that has W 2 income,
works as a realtor and MLO, alsohaving more than 25 percent
interest in a family owned LLC.
Will he be considered a selfemployed and what are the most
(44:34):
critical underwriting?
Well, uh I mean, I would need alittle bit more information here
because we don't know if thisfamily owned LLC is the LLC that
is the employer for them as anMLO and is the LLC, uh, for the
employer for them as a realtor,but I will state, uh, real
(44:55):
estate income is paid as a 1099.
Usually, if you're a realtor,you don't get a W 2.
You get a 1099.
So you would be, your realestate income would definitely
be considered, uh, selfemployment income.
Um, MLO income is usually paidwith a W 2.
And you would be considered anemployee.
(45:18):
of the company where you haveyour license.
Uh, so that part would beemployee, but it's probably
going to, but it's commissionincome.
So, you know, you're going toneed that written verification
of employment usually todocument the commission.
The family LLC part, that ismultiple issues there being
(45:39):
presented.
A, If you have a 25 percentinterest or more in an LLC
that's active, you are, you areself employed.
But above and beyond that, Imean, the fact that you're
saying family owned LLC, I mean,at that point, if you own it
with a couple other familymembers, that's just an LLC.
(46:01):
That's owned with multiplemembers.
The fact that you're 25 percentor greater, uh, owner of that
LLC makes you self employed.
However, um, not being LLC.
Let's just say that you areemployed by a family owned
business.
Let's say in a differentscenario, um, where they ask you
(46:25):
and the questions is you're, youknow, are you employed by
family?
And if you answer yes, thatkicks additional red flags and
additional requirements.
Like, did you know that in mostcases when you are employed by a
family member, they are notgoing to use the year to date
(46:46):
income that you are earning?
They're only going to use thepro, you know, your past two
years income.
They're going to ask for taxreturns.
And they're going to documentyour income based on that.
The reason for that is becausethey know that there may be
collusion between the borrowerand the family member to
(47:07):
increase the current year todate income by, hey, can you
just increase my pay because I'mgoing to buy a house?
And now all of a sudden the yearto date, you know, shows this
great income that doesn't reallyfall in line with what they
made.
In 2023 or 2022 because theybumped up the income just to
help'em qualify.
That's why they only when it's afamily owned, you know, when
(47:30):
you're employed by family,that's why they put those
restrictions.
So when you do have the borrowerthat is employed by a family
member, be aware of what therequirements will be or look at
the guidelines very closely tosee what they will be, because
you are going to have additionalrestrictions there, and your
income is.
May be different than what youoriginally were calculating if
(47:53):
you calculated in a normalmanner without taking this into
consideration that they areemployed by family.
So that's a great question.
Alright, I do not see anyadditional questions, so I do
appreciate everyone being hereand I will see you all next
Tuesday's training.
Have a great day.
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