Written By: Joan Ewing, Op-Ed Writer
Hello – I hope everyone is holding on to their job. In this economy it is frightening to say the least with the downturn of the real estate market. As the market gets tighter and banks are again tightening guidelines, it is important that good quality loans be submitted for underwriting and even more important that the borrowers are qualified to purchase and given instructions not to make any changes in their job or credit report prior to closing.
In my opinion, the one issue that is not needed is for the lender to pick up discrepancies in the file between submission and audit closing – your borrowers could be packed with the moving van parked at the settlement office and the loan is not being funded because the investor ran an updated credit report and there is more debt or the borrower quit their job the day before. EEKKK!!!!!
I just happened to think of the above ways to kill your loan and thought I would share those thoughts with you. Now – back to the series on RED FLAGS during processing. This is the 3rd Part and as stated last week – I will discuss what to look for and the Red Flags on Tax Returns.
Regarding the income of the borrower – determine the type of work the borrower performs Does the borrower receive a 1040 or 1099 from his employer? When calculating income, in addition to base pay, does the borrower receive any bonus, commission or “other” income? If the borrower receives bonus or commission or “other” income – there must be a two year history of receiving this income. My philosophy underwriting a file is simple – if a borrower is receiving a base pay and you do not need the bonus or commission income for qualifying – do not use it!!!! Use only the income that is needed for the borrower to qualify, since bonus and commission income must be averaged and could open up more questions.
What types of income should be suspect of receiving salary and bonus income and when should you request the 1040’s or better yet – the 4506, then you can order the tax returns yourself directly from the IRS.
In addition to obvious occupations that receive salary and bonus and/or commission income – sales, cosmetology field, bartender, and waiting tables – you must also look at the title of the occupation. Is the borrower a “Manager” on the 1003 – verify that the borrower is not the owner. Is the telephone number for the borrower and employer the same? Is the borrower working for a family member? Red flags should be popping up.
Any time there are red flags you need to do your due diligence to preserve the integrity of the loan.
When looking at the tax returns – determine; are the returns signed; was the returns prepared by borrower or independent tax company. If the borrower receives bonus or commission is there a copy of “Unreimbursed Employee Expenses” attached? If so – the percentage of expenses must be deducted from the current year’s income. If the tax returns are signed, what date is the signature? Are the tax returns handwritten? If you have W2’s – verify the income on the W2 compared with the income on the tax returns. Whenever you have a question regarding taxes – use the 4506 that will confirm or alleviate your suspicions.
If you suspect a borrower is working for a family member or owns the business – check with your State Assessment and Taxation Office. The state where I live we can obtain (read only mode) the corporation papers; if the borrower is president, resident agent, any officer of the company. Check with your State Assessments or Licensing Bureau for specific information for your state.
There are many issues involved with tax returns; however, they can tell a story. The information supplied here is very general because every form means something different and if you have an accountant friend – I am sure he/she could answer your questions more in depth than outlined here.
So until next week – Keep Processing. More Later. Happy Thanksgiving with near and dear ones!!
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. I