Written By: Joan Ewing, Op-Ed Writer
Hello – This is the 2nd part of a series of 5 that will alert all loan processors, as well as loan officers and underwriters to “RED FLAGS” on the original application (1003). This week we will cover the income/employment section of the 1003.
The employment section of the 1003 must MAKE SENSE. First the age of the borrower must coincide with the number of years the borrower states he has been working. If the borrower is 22 years old has been working 8 years – that must be questioned. I have had borrowers who have worked in a family business since they have been 14 years old; however, that could open up another can of worms, and we will get into that later. The occupation of the borrower must also align with the number of years of schooling the person disclosed, which was in last week’s article.
Let’s start – the borrower has been working for ABC Company for 2 years (which always seems to be the magic number). You need two pay stubs, 2 years W2’s and a verbal VOE or written VOE. When verifying an employment verbally – it is important to independently obtain the telephone number from Superpages.com; 411; Google, etc. Do not use the telephone number supplied by the borrower on the 1003 and never verify using a cell telephone number. It is always suggested that you verify the employment through Human Resources, or an Office Manager and not the borrower’s direct supervisor, since they would not necessarily have the date of employment and salary.
I would like to state at this point it is important to be aware if the borrower is, or could be, working and receiving commission or bonus income. Also, any borrower working for a school system, whether it is a teacher, bus driver, crossing guard, and secretary or maintenance person – chances are, they get paid 20 pay periods per year – not 26. I always request a written VOE. This could dramatically affect the annual income.
Some red flags to look for when looking at pay stubs and determining income should be – Are the pay stubs consistent? Are they prepared by a payroll company or in-house by the employer? Hand written pay stubs are never acceptable – you will need a copy of the payroll ledger from the company and docs to support appropriate taxes were withheld. If no taxes were withheld from the check – you must get tax returns because the borrower would be considered self-employed.
When obtaining a written VOE check for white-outs or alterations on the verification – I know most companies now fax or e-mail verifications, however, if there is any doubt about the content, I always condition for the original.
It is important to verify the information on the pay stub, for example, verify that the year-to-date income matches with the hourly/monthly rate paid by employer. Recently, I was underwriting a file – the borrower was employed by a hospital, paid bi-monthly ($2000) so it should not have been a problem. However, when checking the year-to-date income – the numbers did not add up to the current salary. For example, the ytd income was $22,000; instead of the current ytd being $24,000 – the pay stub shows $22,300 – I have checked for any non-taxable income, flex spending, etc. and there were no non-taxable items. RED FLAG – Why wouldn’t a hospital calculate correct income? The file was suspended until the issues could be resolved.
If a borrower is working in sales, cosmetology field (including, nails, waxing, etc.) it is known in the industry - the borrower works on commission or tips – Recently I have been instances where an employer, in order to help the employee – states the borrower has been promoted to a salary job and no longer receives commission or even tips. This is of great concern to me, considering where the market has been recently. If a borrower has received a “promotion” and no longer receives tips or commission, I ask for two most recent pay stubs – a written VOE will not suffice. I will most likely also ask for a letter on employer letterhead – explaining the promotion, when it was effective and what duties the borrower has undertaken differently, i.e., supervises other sales persons, etc.
Another red flag is income, taxes, deductions, with no cents, only whole dollars. I would suggest asking for a letter from the employer. Numbers that look squeezed in on pay stubs, W2’s – anything that looks suspicious should be questioned.
Fraud is getting harder to detect since just about all forms can be generated on the computer – therefore, it is important to verify any and all information that is questionable.
In closing this week – I would like to say – The fewer conditions the underwriter requests – the sooner the loan closes. The Loan Officer and Processor are the first point to making the loan close on time. ‘Til next week – Keep Processing. Next week, we will cover looking at the tax returns for borrowers receiving commission, bonus and tip income.
About The Author
Joan Ewing - As an op-ed writer and active FHA DE Underwriter for the past 15 years, Joan Ewing is a proud NAMP® Certified Ambassador Loan Processor (NAMP®-CALP). Joan brings years of FHA Government experience to her writings, letting her readers tap into her underwriting knowledge base.