Loan Officer Training - 12/05/2024 - Understanding Underwriting Challenges for Loan Officers

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 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 Statement Mortgages, P&L Mortgages, Asset Based Mortgage Programs, No Ratio CDFI Loan Programs, DSCR Investor Mortgages, Commercial Mortgages, Fix and Flip Mortgages and thousands more!

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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...

Transcript

Restream recording Dec 05, 2024 • 05:01:39 PM: 0:14

Mhm. Good morning or good afternoon, everyone. Thank you for joining us for today's training. Today we have another great training. It seems like we've had some pretty, uh, good stuff the last couple of training stuff that I hope you will definitely be able to use. Uh, just last night I used the, um, uh, the one on, uh, properly explaining the benefits of a refinance to, uh, to a borrower and, uh, used, uh, all of the guidance. that was provided on that training to, uh, basically, uh, put the borrower at ease and let the borrower know that we were looking out for her best interest, uh, overall. And that's what got us the deal. We were competing with multiple other, uh, lenders. For that deal. But she felt that, uh, my professionalism and combined with my sincerity to assist her with the refinance, uh, is what got us to deal. She felt like, um, I was not just treating her like another commission, right? We were actually concerned, uh, because I really honed in on, um, what was her objective and making sure that the refinance. that she wanted to do really met her objective. So today's training is on understanding underwriting challenges for loan officers, right? This is a great one. This is the one that's going to allow your file to get off on the correct trajectory. Right. You don't want to assume anything on a file. As a matter of fact, on the one that I, um, did yesterday was originally started by another MLO. Uh, the file has a DSCR rate, uh, DSCR rate and term refi. But in the end, what we are disclosing is a non QM full doc loan getting the customer, uh, I believe almost a half a percent lower interest rate at two points lower cost, right? So that, that actually ties into The training we're going to do today on understanding underwriting challenges, because if you understand what the challenges are in the loan and the proper way to meet those challenges, you can structure your loan correctly. And, um, not only structure it correctly, but help the customer meet their goals. The objective. So let's get right in on it here because this is the one that's going to get you the deals. Make sure that your deals close. So, um, what exactly do we mean by loan underwriting? Right? What is underwriting actually mean? Well, excuse me. Underwriting is a process of determining and quantifying the risk on a file by reviewing the file's income. Assets, debt, and property details to ensure eligibility according to a set guidelines. And now, you know, we're all about guidelines here at the Mortgage Calculator, so I'm gonna 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 meet them. Right. So most of the issues usually could revolve around inaccurate. incomplete or missing data. So let's touch on the different components of the loan file that the underwriter is going to review, right? Obviously the first component and underwriting, and remember you as the MLO, I say underwriter here, right? But in essence, you are the initial underwriter on a file. When you're pre approving the borrower, uh, taking that loan application, because remember at the mortgage calculator, when we pre approve a borrower, we're completing a loan application. If it's a TBD pre approval for a purchase, we're not going to have a property. But if it's a refi, we already have a property. So components that we are going to be looking at First one would be the borrower, right? So you definitely want to make sure that you know what type of borrower you have. What borrower type are you dealing with? So that then you could review all of the applicable guidelines for eligible or ineligible borrower types. and eligible or ineligible occupancy by a particular borrower type for a particular transaction type, right? So, um, just note, right? I mean, if it's a four unit property and it's primary, or if it's a Um, you know, I can borrow whatever borrower type you have, um, to give an example, I, I was helping a loan officer structure a file the other day, and this loan officer thought that just because the foreign national, this is a foreign national borrower, but he thought because a foreign national borrower had an ITIN. Which is an international tax ID number. That is just a document where you're given a number so that you can file tax returns. Typically that's a number given to non U. S. residents that do not have social security numbers so that they can file tax returns for. For example, properties, they may have properties in an LLC and they may need to file their income and expense report with the government, right? With the U S government that does require you to do so. So they're not working in the U S right. They just have an investment property here. They have to file a tax return. And the only way to file a tax return is with an ITIN. So most people saying ITIN. number, but the N in ITIN is actually the number. It's an ITIN document, international tax, uh, excuse me, individual taxpayer identification number. So, um, after reviewing additional documentation, the borrower provided like their foreign passport and their visa that they have were granted to be able to come to the U S it was determined that they, the borrower was not an ITIN borrower, but was actually a foreign national borrower. And guess what? The foreign national loan had a lower interest rate and lower cost than the ITIN borrower loan. Uh, so we ended up, uh, structuring that deal and disclosing it to a very happy borrower, but that's just one example where incorrectly categorizing a borrower Could get your loan off on the incorrect trajectory. And then when it gets to underwriting. You're going to get denied or the loan is going to get suspended and they're going to hit you with like a whole bunch of conditions which really were unnecessary and you were just conditioned for that because you started the loan off with an incorrect borrower categorization. Another challenge is going to be with a loan originator that submits an incomplete file. Now that's the biggest challenge, 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 mortgage calculator, we try to screen the files to make sure that files do not get submitted to underwriting with incomplete documentation. Um, but those things can happen where the file gets reviewed. And when the underwriter looks deep into the file, they find out that there's a lot of stuff missing, or it could be that the loan originator Did not properly review the applicable guidelines for the product, right? Maybe it was an agency file. And they just assumed whatever they assumed and didn't review, didn't review the overlays that that particular investor or lender has on their product, on that particular product. And be aware, overlays are not changes to the product. To the guideline overlays are just additional restrictions that the lender or investor put on the product that they are buying, right? They buy those loans and they're going to put certain conditions on the loans that they're going to buy. You, you, for example, if it's a conventional loan, um, using Fannie Mae guidelines, you submitted it to automated underwriting to be you then, but a lender X, Y, Z. May have an additional overlay that, uh, the credit score is below a certain amount. They require, uh, additional reserves or something like that, right? That's not going to be in the Fannie Mae selling guide. But that could be on that particular investors overlays on loans that they're going to buy. So again, loan originators have to make sure that whatever file you want submitted to under, you know, you're going to submit, have it, have it be as complete as possible. And as we, as we go, Through the additional challenges here in this presentation, you are going to understand what I mean by reviewing it and making sure that you're submitting a complete and accurate file because if not, you're just shooting yourself in the foot. You're going to get hit with a laundry list of conditions and what could have been a clean approval. Is all of a sudden going to be a super complicated suspense, which means your file is not approved. They are asking you for additional documentation to be able to consider approving it. It's borderline going to be denied because you just confused the heck out of the underwriter. And they don't know how to make heads or tails of your file because there were probably missing letters of explanation. For extenuating circumstances that you wanted them to consider. Because remember the following. Underwriters are not mind readers, right? I mean, I like to say that I like to provide letters of explanation for a letter of explanation, right? Which means Bara may be explaining a scenario. Providing some documentation. I'm going to get their letter of explanation. I'm going to get the documentation, and if it's not as complete as I think it is, I'm going to do a letter of explanation from me, which would be a processor cert, technically, is what that would be. So when we have a letter of explanation from the processor, from the loan officer, it's really called a processor cert. So I'm going to include a processor cert or possibly an underwriting narrative. Which is going to be a, a nice letter explaining to the underwriter, uh, what are the extenuating circumstances, connecting the dots for them, right? Leaving nothing to chance, because why would you want to leave a possibility to close a loan and get paid to chance? That's like playing roulette with the customer's, uh, interest and with your, uh, commission as well. That's something you want to do. Another challenge would be an appraisal, right? Um, I mean, we've already had a training on reviewing appraisals and, you know, completeness and all the categories of the appraisal. But one thing that I wanted to touch base, base on here is as is versus subject to repairs, right? Now be aware now on the following, and I just was discussing with an MLO this morning, this scenario. Where you have an appraisal that comes in and it's as is, as is, is good, right? When it's as is, that means supposedly there's nothing wrong. With the property. The appraiser hasn't identified any issues with the, uh, with the appraisal, any condition related issues usually is what we're talking about with the appraisal, but then, you know, there's photos in that appraisal, right? And the appraiser, sometimes this is what they do. They don't want to like put subject to repairs for an item, but they'll put a picture. Of the item that they had doubts on, uh, and in this particular case, um, I was discussing with our MLO this morning. It was a ceiling inside the property that had damage. It looks like somebody's foot went through, uh, somebody was walking around an attic on a property. They were stepping on the trusses, maybe misstep and went through the ceiling and there was sort of like damage to the drywall. In the ceiling in one of the rooms. And even though the appraiser marked the appraisal report as is, meaning, you know, no issues, the photo was there, the underwriter reviewed the photo. And the underwriter said, Hey, guess what? Um, this is now subject to, I need to know why is that hole there? Why is that damaging the ceiling there? Is that damage due to a roof leak? What's going on. And the underwriter basically switched, uh, the appraisal in all. Reality to a subject to asking for reinspection by the appraiser to document that there really isn't a roof leak. Now, how's the appraiser really going to determine that? Right? So now you're going to have to get some collaboration, um, and address the issue, possibly tell the seller, Hey, I think you should repair that. I think we may need to bring a roof inspector back out here and just document that the roof is not leaking, provide that roof inspection to the appraiser, and then have the appraiser go back out to the property, take the photo and say, yep, this was due to somebody stepped through the roof. It's it has been repaired. I received an inspection from a, you know, certified roof company stating that and and again, I would have a roofing company go out there and provide this inspection or an inspector that, you know, is aware that all you need them to do is just state that that. Section there is not leaking and then the appraiser can go out, take the photo of the of the repaired area document. Yep. It's not leaking. I got an inspection stating. It's not leaking, send that back to underwriting and then you should be good to go. But the MLOs have to be aware when they're looking at the appraisal, you know, most people just stop at the 1st or the 2nd page where the or the 3rd page 1 of the, you know, it's usually the 2nd or 3rd page with the value 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 photos and realize, hey, wait a minute that this may this may present an issue because we've had that issue come up, for example, with rotted wood. Right. On the facial boards, right? They, they take pictures of the exterior of the property. They don't document. Hey, this is subject to because you got a lot of facial boards, but the underwriter is looking at those photos with a magnifying glass. I think they're looking at those photos with an electron microscope, right? They see it. Now, all of a sudden, they hit you with the reinspection requirement and you've got to do the, you know, the seller has to do the repairs, so forth and so on. So be aware. Okay. Uh, what as is versus subject to repairs means and how it could actually turn into a subject to repairs appraisal because of stuff like that. Usually photos, uh, title and other, uh, underwriting challenge because you could have undisclosed liens or undisclosed liabilities that come up when the title report comes back. So you got to make sure that you review the title report. Don't just. You know, download the email from title. uploaded, you know, to, to your conditions for your processor to submit to underwriting. I mean, the processor should look at it as well, but it is the MLO's duty, first and foremost, to review the title work and make sure Review all the schedules, right? Uh, Schedule A, Schedule B, B1, B2. Look at all those, read every single line and make sure that there isn't something like all of a sudden you got a 110, 000 IRS lien against the, against the, uh, borrower that wasn't known. Or conversely, a 110, 000 IRS lean against the seller if it's a purchase and, uh, now the seller, you know, didn't disclose that. Now the seller may not be able to close or they may have to do, you know, jump over through hoops of fire to be able to get whatever they need to get from the IRS just to be able to close the deal. So do read the complete title report and be on the lookout for any type of undisclosed situations that could affect this. Thanks. Uh, credit and income, obviously two big challenges. I'm giving them the next slide because it's so important because I want to expand on that a little bit. So I'm going to touch, uh, on that on the next slide. Uh, seasoning on title. Now that's another big challenge there, right? Now what do we mean by seasoning on title? Means how long the borrower In this case, let's say if it's a refi, we're talking about how long the borrower has been untitled. If it's a purchase, we're talking about how long the seller has been untitled. And you wonder, you know, let's touch base on the seller because you wonder, wait, but why do I have to worry about how long the untitled? Has been on title. I mean, he's selling the property, right? Well, it's very important because there's a couple of loan types that specifically, uh, put restrictions on the seller. Uh, the first one would be an FHA deal. I think FHA has the 90 day rule where, 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 purchased a property and now they're selling it. In this type of a scenario, if it's an FHA purchase, right, the seller cannot, uh, and the borrower, if it's an FHA deal, cannot get into that contract until the 91st day after the seller came on title. So if they bought the title today, I mean, if they, if they were, if they purchase a property today. And today was the executed day on the deed, right? They would not be able to enter into a purchase agreement to sell that property to an FHA borrower until the 91st day after today, right? You got it. So they buy it, they rehab it. And 45 days later, they get into contract with an FHA borrower. Guess what? When that goes underwriting, They're going to deny the file. They're going to say, sorry, you can't, you can't do it because this is this seller just bought the property 45 days ago and this is an FHA deal and you can't get into contract until 91 days have passed after the seller, uh, was put on title, right? Which would be the day that they had the warranty be signed over to them. Right? So be aware that's an FHA deal. Um, okay. Non QM also super important, right? Uh, a lot of non QM, uh, guidelines. And now again, a non QM, you cannot generalize anything. Uh, non QM deals are all specific. To that particular lender or investor who the loan is being submitted to. So you have to then review and I'm getting a little bit ahead of myself because that's my next one below but you got to review the guidelines to see what seasoning on title requirements there are for that on those particular guidelines because we have some that are very restrictive that say on a non qm sale if the seller is reselling the property. Um, in less than 12 months and whenever a seller is reselling a property in less than 12 months of ownership, that's always considered a flip, right? Less than 12 months of ownership, always considered a flip. And in this case, we have some guidelines that are so restrictive that say, if it's, if it's 12 months, if 12 months have not elapsed, uh, on that deal. Your appraised value will be limited to purchase price plus renovations. So that could be a real big situation because you had the property, uh, the properties on the contract for 350, 000, but maybe the seller bought the property for 200, 000 and put 75, 000 into it, right? The ARV after repaired value could definitely be 350, 000. But that's not the case. The case is not that that's not the market value. The case is that that particular guidelines is wants to be conservative and is going to tell you we're going to go with the lower of the market value or purchase price plus renovations. So definitely now I hope that opens your eyes to when you're getting those purchases. And it's non QM, and you better look at when the seller bought the property, and if more than 12 months have passed since they bought the property, because if not, then you have a flip. And then other scenarios, uh, when you have a flip, then, you know, other less restrictive guidelines, as an example, could say, if it's been zero to 90 days, and it's been, let's say, more than 20%, Increase in the value. You may have to get a second valuation 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 value evaluation method, usually a second appraisal. So it's things like that that you have to be aware of. On a, on a purchase when it's seasoning on title, and then we go to a refi, you know, that's the more common scenario seasoning on title, and this is tends to be more for non QM deals where they may require a certain number of months before on a cash out refi usually is the case, but sometimes some of them state this for a rate and term as well. Um, the same conduit that talks about the 12 month flipping is also the one that talks about, uh, rate and term and cash outs are treated the same and you need to have, uh, X number of months seasoning untitled to be able to use the market value versus purchase price plus renovations or purchase price plus closing costs if no renovations were done. Right. So again, typically, you know, we do this a lot with the DSCR loans where we have most of the options, uh, state, you got to have at least 6 months. Right. Seasoning on title to use the appraised value versus purchase price plus renovations or purchase price plus closing costs. We actually do have an option that allows us to have no seasoning on title, but we may have to provide some type of renovation work on it, or if the increase is more than 20%. Then they're probably going to require a second appraisal, but they'll still do the loan with zero month seasoning as long as it appraises. So there, we do have many options, but you do have to be aware that you have to review the specific guidelines for this issue. Identify the issue up front. You're, you're starting to get the picture here, right? A lot of the issues should be identified up front. So your loan is on the correct trajectory. Uh, property. is another challenge, right? You have to determine what are the eligible and ineligible property types and what would be considered non conforming uses. Notice here I have in parentheses ADUs, right? Accessory Dwelling Units, I think that's what ADU stands for. That's like a, an apartment that, you know, a separate, uh, little rental. 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 that had its own bathroom and separate entry exit door into a rental unit, or maybe even added a, a detached separate a little cottage or whatever rental unit that would be an ADU. So then you got to review the property, you got to review the guidelines, uh, whether you're going agency and then reviewing the selling guides or reviewing actual guidelines for non QM and see how they treat ADUs. For this example, or any other nonconforming uses and see what they actually consider eligible versus ineligible properties for that program type. You would be surprised what's on there. And if, for example, an issue that happens with the 80 uses, you have a property with multiple 80 use now that may or may not be allowed by local zoning, which is some of the guidelines state. We'll accept it if it was done in a workmanlike manner. Others state, yeah, we'll accept it if local zoning says it's acceptable. Right? So you really got to review the guidelines and see who's going to accept what. Because remember, when we're structuring these deals, it's not just about the rate and the cost on the rate, but it's about everything else. You know, does the property really fit what we're trying to do? Assets is another category, right? And specifically sourcing. and seasoning of the funds as well as gift funds, right? Um, if they just deposited that money in there, you, you're looking at the bank statement, look at the bank statement and ask them, Hey, you got some big deposits here. Where'd these come from? Right. And if they say, yeah, my mother gave me an 8, 000 gift, but they gave it to them cash, Right, as opposed to a wire transfer or a check, you know, you're going to have an issue there and then you may have to try to search. For a conduit that does not source the funds or maybe does not season, does not require the funds to be seasoned. We do have conduits, mainly this is going to be more for, uh, in the non QM side and usually more for the investment properties. Where all you got to do is just show the money in the bank. No, no sourcing of the deposits, no seasoning required. And then we have others that say you need two months of sourcing and seasoning. You know, 2 months of seasoning for any large deposits. So again, it's all going to vary on where you're planning on submitting the loan. Now, fraud, another important category there. I mean, that's, uh, we have our fraud guard report. I mean, you're MLO reviewing the documentation up front, right? Remember, you're the initial underwriter. You're like the pre underwriter on the file. You're the quality control on the file. And it's your job to identify, I mean, this is not your sole job, but one of your duties is if you spot inconsistencies in the data or inconsistencies in the documentation, do not pass the buck. And expect that it's the processor's job to bring it up or the underwriter's job to bring it up. No, you are submitting the loan application. So if you knowingly submit, uh, these documents, not that you committed the fraud, but you looked at them, you knew they were probably not legitimate, but you didn't put a hard stop to the file. Okay. You're, you're, you know, the, when the regulators come to, uh, review and inspect this scenario, you are the first person that they're going to, uh, approach regarding the fraudulent documentation to see if you are in collusion with the borrower. And yeah, you can be proven that you were not in collusion with the borrower, but did not do your job to put a hard stop to the file. And there could be repercussions, uh, to your license, uh, or at least minimum of fines. So now we get to guidelines reviews, right? You know, we're all about guidelines here at the Mortgage Calculator. So you, you know, it's going to be a difference if it's an agency loan versus non QM. Agency, and by agency we mean conventional FHA, USDA, VA. Has automated underwriting and has homogeneous, uh, guidelines and selling guys, meaning they're all the same FHA selling guide is FHA USDA is USDA and so forth, but be aware that there, like I mentioned earlier, there may be overlays by the investor or lender that changes things like on an FHA deal, FHA really doesn't have a minimum credit score, but. All of the lenders and investors put different minimum credit scores. Typically the minimum you're going to find anywhere it's 500, but then you got a lot of them, you know, won't go below 580 and then you've got others that won't go below 620 and some that even don't even want to go below 640. So again, those are different overlays and you have to be aware of that when you're going to submit a file. Now in our pricing engine, typically it filters that out, but still it's a, you know, your job. To verify that information, please do be aware that a U. S. findings automated underwriting findings determine the document requirements. and the LTV and DTI limits for agency loans. And then also be aware that non QM is always manually underwritten, right? There is no DU or LP applicable for non QM and that the guidelines for all non QM products are specific to the investor. So every now and then I get a question from an MLO. For a DSCR loan, can we do XYZ? And I basically got a reply. Well, I need more information. Who's the investor that you're contemplating submitting this loan to? And can you share the guidelines so I can review them and have you reviewed them and can you share them so I can review them and give you an answer? Because we cannot generalize any answers for non QM because All of the guidelines are specific to the exact investor that the loan is being submitted to. So, cannot make any assumptions. All DSCR loans are not created equal. The same as all bank statement loans, especially, are not created equal. Some allow overdrafts with explanations on bank statement loans without limit. And others, if you do more than three in a 12 month period, automatically deny you. Right. Two very different scenarios there. So let's talk about in our last slide here, credit and income, or should I say income and credit. First and foremost, determine the correct income type that's applicable for the loan. Going back to the file that I reviewed yesterday where they thought it was going to be a DSCR, but after I got on the phone, uh, with the borrower, because I had some questions, turns out the borrower had very good income and we could actually go full dock with the borrower, uh, and get them a better rate and a better product and actually a more compliant rate. lower cost than what was trying to be structured. So we're, you know, putting together 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 an alt doc borrower, which would be our bank statement option or a profit and loss option, both of those that are for self employed borrowers only. Or is it going to be an asset utilization loan where they have a lot of money in different accounts, stocks, bonds, checking, savings, IRA, 401ks. We could use those. Or is it going to be a debt service coverage ratio loan, DSCR, where we're going to qualify the borrower based on the gross rental income of the property. So very important. To note, very important to note again on these, you got to review the guidelines for each one to see which is, which is the most applicable one. Just because the customer wants to apply for a certain loan type does not mean that is the loan type that is best for them. Uh, that is our job as the licensee to scour the guidelines, properly review all the information, and then put the loan in the correct place. income type. Definitely, we want to review for potential issues, right? Self employed borrowers, especially, how long have they been in business? Are they actually self employed? I mean, we've been going over the different trainings lately on analyzing self employed borrower income. We've gone over all the different business structures and all the different requirements to actually make a borrower be considered self employed borrower. And one of the things that I wanted to note in this one. Is two scenarios. The first scenario would be a borrower that owns the business, but pays himself with pay stubs and W 2s. And then applies not as a self employed borrower, right? Because the application says, you know, are you an owner of the, you know, are you self employed? Do you have a percentage of ownership in the business? But they think, no, I'm getting a W 2. I'm getting pay stubs. I am an employee of the business. Well, you are not an employee of the business that you own, you know, you're just distributing your income to you in different ways. One way to distribute income to yourself when you own a business is through W 2 income. Another way is just to do distributions. Um, which is going to be different, right? It's going to be a K 1 as opposed to a W 2, but my point here is that W 2, that borrower that has W 2s, if they own at least 25 percent of that business, if it's a S Corp or a partnership or an LLC, for example, they're going to be considered self employed. The only one that's not, not going to be considered self employed in a scenario where they have a percentage of ownership in the stock of the business. is when the business structure is a C Corp. With a C Corp, the borrower has to own 100 percent of the stock of the C Corp to be considered self employed. They never own the C Corp, they own 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 C Corp is if they are actually self employed. 100 percent owner of the C Corp, right? So other than that, any other structure, 25 percent or more ownership in the business means that you are self employed. Now, true W 2 employees, obviously what we got to worry about there is going to be variable income. Now, let me explain anybody who's not on salary. They are hourly. Hourly can be considered variable income as well, which may vary from year to year. Uh, and if you have a decline in income from a previous year to now, that could be an issue, right? You know, so you have your hourly people, but then the more obvious variable income types to be aware of is when they also receive commission when they receive overtime. Okay. Or when they receive bonus and I throw in here, this is not variable income, but I also throw in here, complicated pay stubs, like a nurse, right? How many people get those nurse pay stubs with like 10 different income categories and can't make heads or tails of what is a. Weekend differential, nighttime differential, holiday differential, you know, you got all these things there, but the reason I have all of these grouped together in the W 2 employee category is because then the solution for this is usually a written verification of employment, a W V E. Oh, right. That's what you would request from the employer and maybe the employer uses the work numbers. So you just have to figure that part out. Um, but a written verification of employment is the document that's going to clarify this situation to be able to properly document commission over time bonuses and to properly break down the income for a nurse, for example, because maybe in the, in the, uh, WVOE, they group all of those different differentials into base income. So now it's cool now, right? Because now you know what the base income is, plus the overtime and any bonuses as may be applicable. And another situation to be concerned about is employment gaps. Look at the findings in your, in your AUS when it covers employment gaps. Usually they talk about more than 30 days. You got to provide extra documentation and a non qm is usually going to follow the same rule. You don't have, uh, AUS, but you know that there's an employment gap of more than 30 days. Make sure you get some additional documentation, letters of explanation, what happened, why it was, and make sure that you don't have any issues, uh, with your employment gaps causing, uh, the loan to be denied. And finally, talking here about credit. I want to make everybody aware and remind everybody that credit score alone is not the only variable considered. Right. I mean, I mean, we've had scenarios lately where a file has had to be pivoted to another outlet because the borrower did not meet the minimum trade lines required. So be aware that I mean, credit score is the litmus test. In some cases, they may say credit. If you got 3 credit scores, we don't worry about trade lines when we're talking about non QM. An agency is going to be a little bit different, right? Agency is going to be about automated underwriting, approving the borrower. If it approves the borrower and you don't have anything in the findings that asks you for additional trade lines, you're good to go. Non QM, totally different story. You got to review the guidelines and be aware. Another thing to be aware of is rental or mortgage payment history. That may come into play, especially if there's issues with the credit. Underwriters may throw additional conditions in there about, uh, to verify 12 month payment history on rent. Or verify the mortgage payment history to make sure that they're making on time payments on their other properties. Credit events do be aware of. Credit events would be a short sale, foreclosure, bankruptcy, deed in lieu, to name four items that could be, that are considered credit events that could affect your deal. And it's especially in non QM. And then, If you had a first time homebuyer that could also throw additional conditions requirements, for example, on a DSCR loan, right? If they're a first time homebuyer, they may have to provide, prove that they also have a primary housing expense. Or else they may not be considered for that program. Um, if they're a first time investor, you could have additional conditions also. And like, for example, talking about investment properties, this goes back to income. Did you guys, you know, there's a scenario where if it's an investment property on a conventional loan, and the borrower does not have a primary housing expense, guess what? DU will tell, or LP will tell you, you cannot use any rental income generated by the property to help the borrower qualify. They got to qualify solely on their income if they do not have a primary housing expense and they're trying to buy an investment property for a conventional loan, right? So that actually exists and that actually every now and then. Stings people and it only stings them if they don't review all the findings and and see that condition in the findings. So that concludes the presentation part of the training, but I wanted to see if there's any questions. I, I do see a comment in there from the audience, uh, that where it states that the GSEs. Meaning Fannie Mae and Freddie Mac and Jeannie Mae, that's the one for FHA and, uh, VA, uh, have really cracked down on variable income and the calculations and remains one of the highest issues audited in QCs as well. It causes known salability issues, right? So you want to make sure when you do have your variable income on a file that, you know, you dot your I's. Cross your T's and make sure you get that written verification of employment to properly and fully document that variable income. You don't want to have any post closing audit come back at you where they're asking you for this type of information. Uh, so, um, any questions out there? You gotta have some questions. This is your moment to ask me questions, questions you may have in general on files you may be working on income now that you've been provided this information. Well, I'll give it another minute to see if anyone can come up with any questions. But I do appreciate all of you being present today for our training. All right, so I do have a question. Uh, let me see if that question gets put up for me for, for review. No. Okay. I'm going to read it. The question is, uh, we have a borrower that has W 2 income, works as a realtor and MLO, also having more than 25 percent interest in a family owned LLC. Will he be considered a self employed and what are the most critical underwriting? Well, uh I mean, I would need a little bit more information here because we don't know if this family owned LLC is the LLC that is the employer for them as an MLO and is the LLC, uh, for the employer for them as a realtor, but I will state, uh, real 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 real estate income would definitely be considered, uh, self employment income. Um, MLO income is usually paid with a W 2. And you would be considered an employee. of the company where you have your license. Uh, so that part would be employee, but it's probably going to, but it's commission income. So, you know, you're going to need that written verification of employment usually to document the commission. The family LLC part, that is multiple issues there being presented. A, If you have a 25 percent interest or more in an LLC that's active, you are, you are self employed. But above and beyond that, I mean, the fact that you're saying family owned LLC, I mean, at that point, if you own it with a couple other family members, that's just an LLC. That's owned with multiple members. The fact that you're 25 percent or greater, uh, owner of that LLC makes you self employed. However, um, not being LLC. Let's just say that you are employed by a family owned business. Let's say in a different scenario, um, where they ask you and the questions is you're, you know, are you employed by family? And if you answer yes, that kicks additional red flags and additional requirements. Like, did you know that in most cases when you are employed by a family member, they are not going to use the year to date income that you are earning? They're only going to use the pro, you know, your past two years income. They're going to ask for tax returns. And they're going to document your income based on that. The reason for that is because they know that there may be collusion between the borrower and the family member to increase the current year to date income by, hey, can you just increase my pay because I'm going to buy a house? And now all of a sudden the year to date, you know, shows this great income that doesn't really fall in line with what they made. In 2023 or 2022 because they bumped up the income just to help'em qualify. That's why they only when it's a family owned, you know, when you're employed by family, that's why they put those restrictions. So when you do have the borrower that is employed by a family member, be aware of what the requirements will be or look at the guidelines very closely to see what they will be, because you are going to have additional restrictions there, and your income is. May be different than what you originally were calculating if you calculated in a normal manner without taking this into consideration that they are employed by family. So that's a great question. Alright, I do not see any additional questions, so I do appreciate everyone being here and I will see you all next Tuesday's training. Have a great day.