Loan Officer Training - 10/16/2024 - Evaluating Borrower Assets for Real Estate Financing

In this episode of Loan Officer Training, we focus on a critical aspect of real estate financing—evaluating borrower assets. When it comes to approving a loan, a borrower's assets play a key role in determining their financial stability and ability to cover down payments, closing costs, and reserves. But what exactly should you look for when reviewing asset documentation?

We break down the different types of assets, from liquid funds like savings and checking accounts to more complex holdings like investments, retirement accounts, and real estate properties. You'll learn how to verify and calculate eligible assets, understand red flags that may arise during the review process, and ensure compliance with lending guidelines.

Whether you’re new to the mortgage industry or looking to refine your asset evaluation skills, this episode provides practical strategies for assessing a borrower’s financial health and ensuring a smooth path to loan approval.

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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 over 5,000 Non-QM mortgage loan programs 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 over 350 licensed Mortgage Loan Originators can assist our customers with Conventional, FHA, VA and USDA mortgages as well as access thousands of mortgage programs using Alternative Income Documentation such as Bank Statem

Catch all the episodes of the Loan Officer Training Podcast at https://themortgagecalculator.com/Page/Loan-Officer-Training-Series-Podcast

Catch all the episodes of the Loan Officer Training Podcast at https://themortgagecalculator.com/Page/Loan-Officer-Training-Series-Podcast

Loan Officers for Unlimited Free Non-QM Leads & Trainings Join The Mortgage Calculator at https://themortgagecalculator.com/join

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 over 5,000 Non-QM mortgage loan programs 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 over 350 licensed Mortgage Loan Originators can assist our customers with Conventional, FHA, VA and USDA mortgages as well as access...

Transcript

Restream recording Oct 16, 2024 • 04:04:27 PM: 0:13

So welcome everyone. My name is Kyle Hiersche. I'm the CEO of the Mortgage Calculator joined here by our president Nick Hiersche and our CSO Jose Gonzalez. We are lended specializes in non QN loans, excuse me. And what we do every weekday or excuse me, not every weekday, every Tuesday, Wednesday, and Thursday at 12 PM Eastern is our loan officer training series. Where are we going to a deep dive on a loan officer training topic. And today's topic is going to be evaluating borrowers assets. So. I'll go ahead and turn it over to Jose to get it started here. Again, you can drop any questions you have in the chat. We'd be happy to answer them. Good afternoon, everyone, or good morning for those, uh, listeners on the west coast. Thank you for joining us for today's training webinar on evaluating borrower assets for real estate financing. In this training, we're specifically going to be, we're referring to the assets to meet. The cash to close requirements, right? We're not talking about other real estate that they own those types of assets. We're talking about assets to meet the cash to close requirement, right? So let's get right into it. So again, giving a little bit more clarification here. Uh, in a transaction, right, uh, whether it's a purchase where you're going to have down payment or whether it's a refi where you're going to have closing costs and reserves, uh, especially if it's a rate and term refi and not a cash out refi and the cash out refis, uh, most of the times you can meet the reserve requirement with the cash out proceeds. Sometimes you cannot, and on a rate and term, depending on if it's AUS that you get findings asking for reserves, or if it's non QM where you definitely will, will have a reserve requirement. On a rate and term, you definitely need to verify assets to meet the reserve requirement. So, um, so what we're specifically referring to here is the required assets. To be verified for the cash to close. So we're talking about the down payment for the program selected the closing costs and the reserves. And as previously stated, if you're doing an agency loan, right, FHA VA. USDA or conventional. That's what we're referring to when we state agency. Automated underwriting determines the reserves, right? You're going to run your automated underwriting, uh, whether you use LP for Freddie Mac loans or whether you use DO for Fannie Mae loans. And in your findings, we'll let you know if you're approved, it's fine. If you weren't approved, maybe it's letting you know how much. needs to be verified for reserves and it could be that your borrower is short. So always look to your AUS findings for the reserve requirement on agency loans. And on non QM loans, as we always like to state, right, remember that non QM guidelines are all specific To the option being selected. They are not homogeneous. You can't generalize across the board. What, uh, how to treat a non QM loan for reserves. You do have to look at the specific guidelines for the option selected and make sure that you read the fine print on reserve requirements. Are they asking for three months? Are they asking for six months? Are there, uh, are there additional reserves to be added if they have, um, additional finance properties? Are there additional reserves to be added if they're financing more than one property at the same time? I recently had one where the reserves jumped from six months to 10 months because the borrower had their fat, their primary finance, and they were also financing two purchases at the same time. So the reserve requirement increased from six months to 10 months per transaction. So you don't want to get caught off guard with those types of scenarios. So, what are the most common, uh, asset types that borrowers could be, um, you know, showing us in their application? Well, the most common obviously is depository accounts. We're talking about checking, savings, money market, and, and any other type of, uh, liquid depository account, right? Those are very liquid assets. The preferred always counted at 100 percent of face value. Stocks, bonds, and mutual funds are another category of assets. And, uh, for this category, you do have to review either your AUS, uh, the selling guide or your guidelines. If it's not, you have to see if they're going to give you 100 percent of the asset or if it's going to receive a haircut, as sometimes is the case. Uh, business assets. Another interesting category and here we're really referring to um, liquid assets that the business has, right? Checking accounts, savings accounts, money markets. We're not really talking about, you know, buildings, inventory or anything like that. However, in some cases people do get a loan against the inventory to get money, uh, for work, right? Uh, so that could be something that you're faced but typically when we're talking business assets we're talking about liquid assets. Sale of real property is another asset. Now, uh, real property, we're talking about real estate, right? They could have a pending sale on a property. For example, they're going to net 200, 000 from the sale. That's an asset of which you're going to have to show later up closing disclosure and the transaction, uh, history showing the money going into their account, uh, gifts and other interesting category. Definitely want to make sure that whoever's giving the gift is, uh, an authorized gift donor type for the transaction selected interested party contributions. Now here, we're talking about any person who is a party to the transaction. So that could be the seller, uh, that could also be the realtor. Uh, that could also be the lender, interested party contributions, typically the one that comes into play most in interested party contributions is the seller. Retirement funds, uh, most people may use the terminology of 401k. When they're really referring to retirement funds could be a 401k, could be an IRA, uh, many different types of, uh, retirement funds that are basically, uh, tax deferred investments. That's the whole thing on a retirement fund. You, the money is, uh, invested into the retirement fund pre tax. So that's where the additional, um, savings is there. You are investing your pre tax income. It, it will grow. And then at some point in the future, when you do withdraw, you will be taxed and hopefully it'll be at a lower rate because you will be older and it'll be a different tax bracket. Cash on hand. That's a very problematic asset. Uh, that's one of the ones that we have difficulty verifying. I put it on there only because it's, you're going to face that scenario where they're going to tell you they got 30, 000, but it's not in the bank. So then that's where you're going to have to scour the guidelines to see what option you can find that may not have any sourcing Or seasoning of large deposits of which there are, but those tend to be more business purpose loans, uh, right. The SCR closing in an entity where you, you're going to find the, uh, some options that do not source nor season large deposits, sale of personal assets. Not to be confused with sale of real property, real properties, real estate, personal assets could be you sold a car and that you had lying around and you got an extra six or 7, 000. Well, you're going to have to show the paper trail of the sale of that car, bill of sale, transfer of title, proof of receiving the money. A number of different things that you would have to, uh, prove there. Grants, uh, another interesting category. Grants typically tend to be, uh, from government type agencies, whether it be federal, state, local. Uh, usually going to be involved with some kind of, um, down payment assistance or income based assistance plan. Uh, where these grants, uh, will come into play inheritance, uh, not to be confused with a gift. I mean, the inheritance is money. You inherited. So you're just going to have to provide documentation for the inheritance, right? Is there a will? Is there a paper trail showing the money leaving the, um, the individual's account who provided the inheritance and the money going into the borrower's account? But mainly the, the will is going to be, uh, the important document there that's going to document the inheritance. Uh, asset based loan. Another interesting category. One of the most common examples of an asset based loan is, again, you have your retirement fund or your 401k, and you can actually draw a loan against your 401k so that you don't have to cash in your 401k. You leave it in place, you get a loan backed by your 401k, and you're actually going to pay yourself back the principal of that loan. And the interest while at the same time, the investment continues in your portfolio, accruing value and interest, right? So you're not cashing in your 401k, um, asset there and usually paying a penalty. To do so, you're just getting a loan against the 401k. One of the good things to note, and I do bring this up in the coming slides, but one of the good things to note when you do have an asset based loan like from a 401k is that if you have enough assets to cut still in the account to cover the amount of the loan. And since it is also a secured loan and the loan is not counted against the liability against the DTI of the borrower. And last but not least, a very tricky category there is foreign accounts. You are going to have to review the selling guides and the guidelines very carefully to see if assets held, uh, And here we're talking about money basically held in a foreign checking or savings account can be used if it is kept in that foreign checking or savings account and not moved into a U. S. account. Based checking account. In some cases, uh, you will be able to use these assets held in a foreign account, uh, to count towards reserves, obviously having to show the currency exchange rate and in other cases, any money to be considered as assets do have to be in a U S based account where they can be easily accessed because that's the issue with the foreign accounts. Uh, they tend to have restrictions, uh, with the. moving in and out of funds from the account. They may not allow the borrower to readily withdraw all of the money in the account to meet a need. So do be aware and do check your guidelines or selling guide if it's an agency loan to see how you are to treat those foreign checking and savings accounts. So let's get into the verification of some of the more common types of assets, right? The first one, the depository accounts, again, I mentioned, uh, you have depository accounts, but you also have stocks account. Bonds and mutual funds, which fall into the, uh, liquid type of assets. And again, if it's an agency loan, check with your findings to see if you even have to verify assets. Um, many times, if it's a refi, you don't have to verify assets or to see if a US and the findings is asking you to verify one month. Assets or two month assets, so it could be no assets need to be verified or one month or two months. That's going to be on the findings of AUS, either LP or DO, whichever you ran. Non QM, again, you're talking about individual guidelines for each option. And the guidelines are going to tell you, you either have to verify one month or two months, uh, or in some cases, like I mentioned, where they're not asking you to verify any type of seasoning or sourcing. So again, Most important here, look at the guidelines to know what you need to verify one month or two months, either with bank statements or another method to verify the asset is with the verification of deposit. This is less commonly used now, the VOD, right? Uh, Most of the time, the, uh, underwriters are going to want the bank statements, uh, but please note, if you do provide a VOD, then, uh, that eliminates some of the issues, uh, with, you know, all of the deposit details, but again, if you're looking to verify, for example, the clearing of an escrow deposit from the borrower's account, You're going to have to provide that bank statement anyhow. So make sure you reviewed it. So you don't get, uh, any, uh, surprises when you do provide that bank statement. Uh, some of the surprises you would be looking to avoid are conditions for large deposits, you know, typically, and it really depends on the loan type. What a large deposit is going to be, right? If you're talking about an eight, a conventional loan, Fannie or Freddie, usually the findings will let you know what a large deposit is and a large deposit is usually going to be any deposit that's 50 percent or greater than the monthly income of the borrower for a large deposit that's, that's conventional. FHA different story. FHA, it's really up to the discretion. of the underwriter but usually any deposit over a thousand dollars on an FHA loan is going to be flagged, uh, for to verify documentation. So do be aware when you are reviewing your bank statements what can catch you off guard. Large deposits and also NSF's Or overdrafts. That's another category that could result in, uh, you know, letters of explanations, right? In the least. Business assets is another, um, category here. And again, we're talking more about banks, bank deposits. One of the things you are going to know when you do provide the bank statements. from a business account where it's being used to meet the reserve requirement or the down payment is that you are going to be required or the borrower is going to be required to provide a letter from their CPA. And I use the term CPA here interchangeably to mean actual CPA or tax preparer or accountant. Any, any of those three could prepare the letter that is going to stay. That using the assets for the transaction, like for the down payment, closing costs, reserves for whatever is going to be used will not negatively affect the business operations, right? That's a critical component there. You're either going to have to provide that letter or you're actually going to have to provide a cash flow analysis that will show that pulling that money. Out of the business will not negatively affect the operations, but I think it's a lot easier and simpler to get the letter from the accountant than it is to show a full cashflow analysis minus the funds in question. Now, if it is sale of real property, like a pending sale on their current primary or an investment property, or maybe a property that already just recently sold, right? You're going to have that big old two, 300, 000 deposit. Large deposit going into their account on top of that. So you're going to verify that asset with a copy of the closing disclosure. Once the transaction does close showing the net proceeds that were sent to the seller. And then there may also be some documentation required confirming. That the borrower actually owned that property. I mean, it's if the closing statement is in their name and it's their current primary or a property listed on the schedule of real estate owned, that's that's pretty basic. But if the property is in an LLC, then you probably would have to provide some type of documentation showing that they are the owner of that LLC. in order to grant them those assets. Gifts, right? So one of the main things you want to check on on gifts is that you have a gift letter signed from an authorized donor. Now, what do I mean by an authorized donor? Well, depending on the loan type, and they are all different. For example, Fannie Mae and Freddie Mac categorize acceptable gift donors. There are some differences, right? Whereas Freddie Mac actually allows the gift to come from a real close personal friend, right? Fannie Mae doesn't say that. Fannie Mae has other categories, but doesn't say a really close personal friend. So that may be one reason, you know, why you'd go Freddie over Fannie. But just make sure that the donor is authorized for the transaction type, right? And again, FHA is real strict. It's like relatives or it could be like your fiance could give you the gift, but you just can't get it from a friend. So do be aware that if the donor is not on the list of authorized donors to give, a gift, your gift, uh, may be rejected. And then you're going to have to provide a, uh, proof of the transfer of the gift. So you're definitely going to need a transaction history from the borrower's account showing the money entering the borrower's account and the new balance. And then you're going to have to provide from the donor either A, um, wire transfer confirmation clearly identifying who the transfer is coming from, what account is coming from and who the transfer is being sent to and the amount of the transfer and if the, if it wasn't done as a part of a wire transfer, if it was a check, for example, then you're probably going to need a copy of that check. As well as the transaction history from the donor showing that money clearing their account. So, uh, it's always best that they send it via wire transfer so you can avoid having to ask the The donor to provide transaction history from their account, which they may be hesitant to provide as they are not a borrower on the transaction and may feel like that's private information. Interested party contributions. Again, I mentioned who we're talking about here. Could be a seller credit, could be a realtor credit, could be a lender credit. Confirm that the amount is within the allowable limits. For the loan program and do be aware that, uh, especially with investment properties, there could be limits on interested party contribution. And also depending on the LTV on an agency loan on a conventional loan, right? If it's a 5%, you're looking at, at one limit for interested party contribution. If it's 5 percent down, if it's 10 percent down, you're looking at a different option. So do be aware that the interest of party contributions to vary. between agency and non QM and also just, you know, from loan to loan depending on, especially for non QM, depending on the investor chosen and depending on the borrower type, seems to be a lot more restrictive if the borrower is an investor as opposed to a primary or second home. Retirement Uh, funds is a very tricky category. Uh so, if putting retirement funds in an application, for example, to meet reserve requirements, do be aware that they may actually require liquidation of the funds that are being used to meet the reserve requirement. So, again, you have to look at the guidelines. Uh if it's not QM or the selling guide of its agency to see how they're going to treat retirement funds. If the funds are actually going to be liquidated, that's not an issue. That's pretty easy, right? You're going to show the paper trail. But if the funds are not going to be liquidated, that's what becomes a little bit trickier, where you're actually going to have to provide the terms and conditions of withdrawal. If the funds were to be withdrawn, they want to make sure that you, that the borrower can actually withdraw the funds. For example, if it's a housing hardship situation. That's one of the reasons where they would let you withdraw funds from a retirement account. So do be aware, uh, there are restrictions on using retirement funds and if you think it's going to be an issue getting the necessary documentation, uh, consider if you even need to include those retirement funds in the application. Sometimes we put them in there just because we want the deal to look good. Well, I would strongly consider, you know, running your automated underwriting without them unless those funds are needed to be actually liquidate because they're part of the funds for the cash to close and not for the reserve requirements. So do be aware of the different ways that retirement fund accounts are handled between non QM and agencies. Cash on hand I have on there is only because I want to be able to state that cash on hand is not verifiable, right? They all of a sudden go and deposit 20, 000 or 10, 000 into their account. Now, if it's an agency loan and the borrower makes 12, 000 a month, then you'd be, that 5, 000 would be less than the 6, 000 limit before deposit is considered a large deposit because they usually use 50%. of their income. Anything above 50 percent is a large deposit, but that's for conventional and that's for conventional only Fannie Mae and Freddie Mac. Uh, for any of the other loans, cash on hand is going to be an issue. So make sure that you discuss all of the sources of the borrower's funds to close a transaction and if any of them are cash on hand so that you can review all the available guidelines and selling guides to see how you can navigate the, the, the waters effectively to be able to capture, uh, the cash as an asset. And what we're looking to do here, one of the things you want to make sure, um, as you're reviewing the bank accounts, as you're reviewing all these statements, is look for undisclosed loans or liabilities that may appear. Sometimes that'll happen and it's showing up as an auto debit. on a bank statement or it could actually even be showing up as an auto debit on a pay stub, right? So, but usually you're also going to possibly see it on a bank statement. So do look for undisclosed loans or liabilities. And again, as I already mentioned, do review for large deposits or large transfers because they may see a large transfer for 15, 000 Leaving the account payable to ABC title company, right? So what are they going to think there? They're going to think, wait a minute, there is an undisclosed, possible undisclosed purchase transaction here that we're not aware of. And that would be a contingent liability. Any concurrent purchase, That has to be taken into consideration if it's a DTI loan. If it's a DSCR loan, it's not going to be an issue, but if it's a loan where the borrower's income is being used and where DTI is being calculated, uh, any, uh, type of undisclosed purchase transaction is going to be an issue and it's going to be documented because there is one of the questions on the application and the declarations does ask if there's any other loans that the borrower is applying for other than the loans, um, That they're applying for this subject property. And in our final slide here, we're going to, you know, discussing sourcing and seasoning of the asset. And again, in the seasoning part, you know, we're not talking about salt and pepper, we're talking about how long has that, uh, borrower had possession of the asset, right? Uh, has it been one month in their account? Has it been two months? Has it been three months? because depending on, again, depending on the option chosen, if it's an agency loan or it's non QM, you're going to have different seasoning requirements and different documentation that you're going to need to require from the borrower. Please do be aware that unsourced funds Right. So you can't source where that big deposit came from. And it's an option that requires sourcing and seasoning of the assets. Any unsourced funds will be deducted from the available assets. for the transaction. So to be aware of that. So what are the common, uh, ways that we can source and season some of the more common assets in a transaction? Well, the earnest money deposit, also referred to as the EMD, uh, the escrow deposit that is very easily verified by either a canceled check or Uh, or, uh, and or a bank statement because even if you show the canceled check, they're going to want to see the, uh, bank statement or the transaction, transaction history showing the money leaving the account. And even if you provide a wire, uh, a wire transfer confirmation, just a separate wire transfer confirmation, not the actual statement or transaction history showing that it was a wire transfer. If you provide the confirmation, you're still going to have to provide either the statement. Or the transaction history showing the money, leaving the account and hopefully in the transfer, it shows the amount and who it was being transferred to ABC title company. So that then you will have verified your escrow money deposit. Now, if it's a new account or if it's a large deposit, uh, you're just going to have to show where it came from. Was it savings? Was it from earnings, right? You got paid, uh, and you put the money into a new account and you can show the paper trail. Was it a gift from someone that you deposited? So, if you're going to put money into into the account or open a new account with whether it's a sale of an asset or was it a loan, whatever it may be, you're going to have to provide it if it's a new account, assuming that the option you've chosen requires you to source large deposits and also make sure that they are seasoned. If the borrower is using business assets, uh, as part of the funds to close, obviously, they they must be self employed. They have to have. access to the assets. Uh, if there are more than one owner of the business, you will need a, um, funds access letter signed by the other partner or partners if there's more than one. So if, for example, the operating agreement shows that our borrower is 33 percent, uh, owner or 33 and a third to be exact owner of that business, that means there's two other partners that need to provide. a funds access letter that the borrower has a hundred percent access to the funds in business account one, two, three, four with, uh, best bank in the USA Inc. Right. Uh, the business also, like I already mentioned the business cashflow analysis must show no negative impact on the business, or preferably as opposed to having to provide a business cashflow analysis. Simply provide a letter from the tax preparer slash CPA slash accountant stating that the borrower withdrawing 52, 000 from checking account one, two, three, four at ABC bank will have no negative impact on the operations of, of one, two, three Inc. Business guess. Um, but what you need to know on gifts first and foremost is does the occupancy type on the loan even allow for gifts? That tends to be more of an issue with investment properties, even though we do have options for investment properties that actually allow a hundred percent gift. Um, usually though, in all of those cases, the gift cannot be used for reserves, but we do have options that allow a hundred percent gifts on investment properties, uh, non QM. So again, does the occupancy allow for gifts? Is the gift being used for reserves? Got to make sure you look at that one because typically gifts cannot be used for reserves. That's, uh, usually across the board, you're not going to, uh, be allowed to use a gift for reserves. Is the donor an interested party to the transaction? There may be restrictions there. If the person giving the, the, the gift is also the seller, then, uh, you're going to have issues, uh, there possibly. So just make sure that you clear. Any issues with the gifts being provided by an interesting party to the transaction. And last but not least, asset based loan like those that you can obtain from your 401k retirement account. I previously mentioned this. Uh, the loans do not have to be counted against the liabilities as long as the 401k assets cover the loan amount. And also it's a secured loan. So do look at the selling guide for agency loans on that and do look at the guidelines for your non QM loans on how to treat asset based loans. So many different ways here to source and season assets and verify your assets. These are not very complicated, uh, things to take into consideration, but could definitely complicate your loan. If you go above the limit, for example, of the gift or the occupancy type for the loan type does not even allow gifts and you're restructuring the whole transaction with the gift. And now I guess underwriting. And they suspended your loan because the borrower is short assets. So looking forward to helping you all structure your loans and clear any asset based questions. All right. Thank you, Jose. I don't see any questions here. I'll give it just a second in case we have any questions come in, but definitely appreciate everybody tuning in. Definitely great topics here. Remember that we do this training at 12 p. m Eastern on every Tuesday, Wednesday and Thursday. So we'll be back tomorrow with a new topic for you. Still don't see any questions, so we'll go ahead and wrap it up. So we will see everyone tomorrow at 12 p. m. Eastern for the next episode of the Loan Officer Trading Series with the Mortgage Calculator. Have a great day, everybody.