Assets

Assets may be the easiest thing to figure out about a loan.  You either have them or you don't.  Assets are more important for purchases than refinances because, for purchases, you have to show the money you can put for a down payment and to cover closing costs.  However, sometimes for a refinance you will have to show assets or "reserves", if you are doing a cash-out refinance or if you are paying money towards your refinance.  Some lenders, us included, will not pre-approve you unless you can show enough for a down payment and the loan's closing costs.  

Assets can be in many forms, but the most common are bank accounts (both savings and checking), stock accounts, and retirement accounts.  One key thing to know is what funds are considered "liquid".  Liquid funds are funds that can be accessed quickly and easily with no penalty or delay.  Generally, all checking and savings accounts are considered liquid funds, and if any cash or retirement accounts have cash options, those can be considered liquid as well.

Now if funds are not liquid and they are held in a stock or retirement account, the lender will take a haircut on those available funds to protect their interests.  Usually, that haircut is 70%, so if you show $10,000 in a retirement account, the lender will consider that as $7,000 in available funds.  So if you are looking to show a lender as much in assets as possible, it's smart to make everything liquid ahead of time so that no haircut is applied.

One thing to note also about assets is any large deposit and routine withdrawal.  Any large deposits made on the asset statements submitted have to be sourced.  This does not include being paid by your employer, however.  And any large funds are considered to be 50% or more of your household's monthly income.  So if your household makes $10,000 per month, any deposits of $5,000 or greater into an account you are using have to be sourced.  That's why, if you are receiving funds from a friend or relative, have them send it to you at least 2 months in advance, or have them send it to escrow as gift funds.  Escrow would then apply those funds to your down payment and closing costs.  Also, if you have any routine withdrawals, the lender will make note of this and may inquire about them, especially if it looks like you are paying someone else, which they have to make sure is not something court-ordered, such as alimony or child support.

If you can just use common sense and follow what I've said above, you can avoid a lot of unnecessary conditions in regard to your mortgage loan.  If not, you could end up having to provide your broker/lender a lot of documentation, which could lead to having to reach out to your bank or financial institution, which as we all know is never fun.  

Up Front Documentation

 Part of the process of setting up a loan for a client as a Loan Specialist is going through documentation.  At our company, we pre-underwrite files, meaning we basically do our own version of underwriting a file to see what a client qualifies for.  It's like a rough draft of the underwriting process.  And as a part of that process, we request documentation up front so that we can properly pre-underwrite the file.  

For standard W-2 employed borrowers, we request their most recent 30 days of pay stubs, their last two years of W-2's, their last two bank statements from any account they wish to use, and their driver's license (to verify they are who they are).  

For self-employed borrowers, instead of W-2's and pay stubs, we request their most recent two years of tax returns.  During the COVID-19 pandemic, our main lender had an overlay requiring a year-to-date profit and loss statement as well because self-employed businesses were hit hard, but that has since been lifted.  

Some clients require additional documentation.  For clients that already have at least one mortgage, we request a most recent mortgage statement.  For clients that collect rental income, we request tax returns from them to verify the income, or if the property was newly purchased, a lease agreement.  For clients that own a property free and clear, we request their insurance declarations page.  Property taxes generally can be found online.

Of the standard documentation, there are a few things to look for when going through the documents.  Here's what to look for on each:

Pay stub(s) - Borrower's information, employer's information, start and end dates, pay date, pay rate, year-to-date earnings, taxes taken out.  

W-2's - Borrower's name and address, employer's name and address, year, borrower's SSN (or last 4), all necessary boxes shown and filled.

Bank statements - Borrower's name and address, account number, institution's name and address, account balance, list of transactions, all pages included

Tax returns - Borrower's name and SSN, all necessary schedules included, pertinent information entered correctly (rental income, self-employed income).

Mortgage statement - Borrower's name and property address, interest rate, amounts for principal, interest, and escrow (if necessary), next payment due date, next payment amount

Lease agreement - Borrower's name or their property management company's name, date and terms of lease, rent amount, signed by both parties

That's the basics for those, although there are other things we may look for on those documents depending on the borrower's situation.

We do on occasion get documents that don't work.  The most common reasons for documents the clients submit not working are that they are the wrong document (tax transcript instead of a W-2, summary statement instead of an official bank statement, mortgage interest statement instead of a mortgage statement), or that they submitted a document that is missing a page, or that they submitted a document with information not visible or legible (if they took a picture of their document, this is fairly common).

As a Loan Specialist, I basically have to get documentation that will work for the underwriters.  I can't use illegible images or screenshots that the lender would not accept.  I also have to ensure each document we receive is in .PDF format, and if for some reason it comes in as a different format, finding a way to convert it to .PDF.  

Dealing with documentation is one of my favorite parts of the job, as I enjoy dealing with Adobe Acrobat and working with files, moving them around from one place to another.  My least favorite part is when a client is clearly struggling to get us the proper document, whether it be because they're not technologically savvy or because they don't have the means to get the documents to us.  

But all in all, it's towards the easier end of all the tasks and responsiblities I have as a Loan Specialist, and there's rarely a difficult challenge.  Generally it's fairly easy to determine if the lender will accept a certain document or not, especially once you have the experience and you've seen what they've accepted and what they've rejected.

Calculating Income

What all of the loan officers that I work with would agree upon is my biggest job is calculating income.  It's my job as the Loan Specialist to calculate each client's income accurately.  Anyone who is good at math like me should be able to calculate a client's income.  

Fortunately, I have the use of Fannie Mae's income calculator through one of our lender's.  All I need to calculate income is a client's recent pay stub and their W-2(s) if they were with their current employer last year and possibly the previous year as well.  

But any underwriter or Loan Specialist worth their grain of salt can calculate income by hand; at least they can calculate salaried or hourly income by hand.  There are two kinds of common salaried employment that require a bit of math to figure out, and those are two times a month salaried (also called semi-monthly salaried) and bi-weekly salaried.  Two times a month salaried employees get paid twice every month, typically on the first or last day and the 15th day (or so).  Bi-weekly salaried employees get paid every two weeks.  Because months cannot be divided equally into number of weeks, these differ slightly.  

To calculate a borrower's two times a month salaried income, take the amount they are paid twice a month and multiply it by two.  It's that simple.  You could also multiply by 24 to see their annual salary.  

To calculate a borrower's bi-weekly salaried income, you multiply the amount they are paid every two weeks by 26, because they get paid (roughly) 26 times per year, since there are roughly 52 weeks in a year.  You then divide by 12 to get their monthly income.  

To calculate hourly employees, you first have to figure out the amount of hours they work.  Hopefully it's close to 40 hours/week.  The problem with fluctuating hours is that a borrower must have at least a 12 month history of this in order to use their income, because otherwise the lender looks at it as unstable income.  Anyway, you take their usual hours worked (say, 40) and multiply by their hourly rate.  Some borrowers show multiple hourly rates, so the underwriter will always go with the lower rate.  Then you multiply by 52 to get how much they make each year, and divide by 12 to get their monthly amount.  If a borrower shows fluctuating hours, it's usually best to go conservative and calculate with their lowest amount of hours shown on a pay stub.

Besides those mentioned above, there's also self-employed income.  Depending on the complexity of the self-employed income, this is a lot harder to calculate by hand.  Fortunately, that's why Fannie Mae came out with their income calculator.  A couple things I've learned are that if the borrower shows declining income, the lender will go with only the most recent year's calculation, since averaging the prior year would raise it.  If a borrower shows increasing income, the lender will either go with the calculation for the most recent year or the last two years averaged.  This depends on the AUS results.  The AUS... well that's for another post.

Calculating income can be high pressure and stressful.  If you do it wrong and you give a client too much, you could blow up their deal and cause them to lose out on a home and possibly even lose out on thousands of dollars in earnest money they put down.  But if you can build the experience, rely upon tools and references at your disposal, it's really not too hard or bad.