Mortgage Educators of America

Determining Income Documentation

2012-02-13T08:43:00.000-05:00

Weaving through the maze of income documentation types can be challenging - not only for you but your customer as well! Use our handy chart to determine your borrower's income type and the corresponding documentation generally required by the Agencies and most investors. You'll also find the required history and continuance in order to use the income for qualification purposes and where to find the income on tax returns.

Income Type	Documentation	History	Continuance	1040 (page)
Salaried	2 years most recent W-2’s Paystub(s) covering the most recent 30 days	2 years	3 years	Page 1
Overtime	2 years most recent W-2’s Paystub(s) covering most recent 30 days VOE	2 years	3 years	Page 1
Bonus	2 years most recent W-2’s Paystub(s) covering most recent 30 days VOE	2 years	3 years	Page 1
Part Time	2 years most recent W-2’s Paystub(s) covering most recent 30 days	2 years	3 years	Page 1
Commission	2 years most recent W-2’s Paystub(s) covering most recent 30 days 2 years most recent personal tax returns (2106 unreimbursed expenses) VOE	2 years	3 years	Page 1 or Schedule C
Pension / Retirement	Awards letter Most recent check stubs or Bank statement showing deposit 1099	2 months	3 years	Page 1
Permanent Disability	Awards letter and Dr. Letter Most recent check stubs or Bank statement showing deposits 1099	1 month	3 years	Page1
Social Security Benefits	Awards letter Most recent check stubs or Bank statement showing deposits 1099	1 month	3 years	Page 1
Sole Proprietorship	2 years most recent tax returns with all schedules Copy of business license	2 years	3 years	Sched C
Partnership	2 years most recent personal tax returns and partnership returns with all schedules Copy of business license Partnership Agreement	2 years	3 years	Schedule E
S Corp	2 years most recent personal tax returns and corporate tax returns with all schedules Copy of business license	2 years	3 years	Schedule E
Corporation	2 years most recent personal and corporate tax returns with all schedules 2 years most recent W-2s and paystub(s) covering a 30 day period	2 years	3 years	Page 1
Unemployment	2 years most recent personal tax returns with all schedules Most recent check stubs Proof of seasonality of work	2 years	3 years	Page 1
Interest or Dividend	2 years most recent personal tax returns with all schedules Account statements showing assets still owned	2 years	3 years	Schedule B
Note Receivable	2 years most recent personal tax returns with all schedules Copy of Note	1-2 years	3 years	Schedule B
Capital Gains	2 years most recent personal tax returns with all schedules Evidence of assets still owned	3 years	3 years	Schedule D
Rental	2 years most recent personal tax returns with all schedules Lease agreements Proof of housing expenses	New – 2 years	3 years	Schedule E
Royalty	2 years of most recent personal tax returns with all schedules Most recent check stubs Copy of contract	1 year	3 years	Schedule E
Trust	2 years most recent personal tax returns with all schedules	1 year	3 years	ScheduleE
Farm	2 years most recent personal tax returns with all schedules YTD Income/Expense Statement	2 years	3 years	Schedule F
Family Support	Divorce decree or court order Check stubs or evidence of deposits for 6-12 months	1 year	3 years	Page 1
Tips	2 years most recent personal tax returns with all schedules Recent paystub(s) covering a 30 day period or YTD income statement	2 years	3 years	Page 1 of Schedule C
2^nd Job	Verify based on income type	2 years	3 years	Based on income type
Foster Care	Assignment letter Most recent check stubs from agency	2 years	3 years	None

Mathematical Formulas For Calculating Borrower Income

2012-02-06T07:00:00.000-05:00

Do you ever want to pull your hair out trying to calculate borrower income? For most originators, this can be an arduous process. It's helpful if you have the formulas in front of you to help keep you on track!

Hourly – Paid Weekly

Hourly rate X # of hours worked per week = weekly income X 52 weeks / 12 = GMI

Hourly - Paid Bi-Weekly (every other week or 26 weeks)

Hourly rate X # of hours per pay period = bi-weekly income X 26 / 12 = GMI

Hourly - Paid Semi-Monthly (on the 1^st & 15^th of the month or 24 weeks)

Hourly rate X # of hours per pay period = semi-monthly income X 24 / 12 = GMI

Salaried – Paid Weekly

Gross weekly rate X 52 weeks / 12 = GMI

Salaried – Paid Bi-Weekly (every other week)

Gross bi-weekly rate X 26 / 12 = GMI

Salaried – Paid Semi-Monthly (1^st & 15^th of the month)

Gross semi-monthly rate X 24 / 12 = GMI

Seasonal – 40 Hours +/- Income Must Be Averaged Over 2 Year Period (not using unemployment income)

YTD earnings from current paystub + previous years base earnings from W-2 or VOE / # of months covered (1-24 months) = average GMI

Seasonal – 40 Hours +/- income must me averaged over 2 year period (using unemployment income)

YTD earnings from current paystub + previous years base earnings from W-2 or VOE + year 1 unemployment income and year 2 unemployment income / # of months covered (1-24 months) = average GMI

Overtime/Bonus Income – Must be averaged - this type of income will be considered effective income if received for 2 years and continuance can be verified.

Overtime/bonus YTD earnings from current paystub + previous years overtime/bonus earnings from VOE / # of months covered = average GMI overtime/Bonus income

Commission Income – Must be averaged - this type of income will be considered effective income if received for 2 years and continuance can be verified.

Commission YTD earnings from paystub + previous years commission earnings from VOE – business expenses on Form 2106 for the past 2 years / 24 = average GMI commission income

Dividends/Interest Income – Must be averaged – this type of income will be considered effective income if received for 2 years and continuance can be verified. The most recent 2 years tax returns should be collected to verify history and evidence the asset still exists and generating income. You should deduct from the income any dividend or interest earned on the assets that will be used for closing.

Dividends/Interest income for year 1 from tax return + Dividends/Interest income for year 2 from tax return (8A & 9A on Page 1 of 1040s or Schedule B) – funds being used for closing / 24 = average dividends/interest income

Net Rental Income – tax return method and must be derived from the REO section of the 1003; must be supported by the most recent 2 years tax returns (Schedule E)

Rental income on line 3 on Schedule E from year 1 + rental income on line 3 on Schedule E from previous year – rental expenses from line 19 on Schedule E for year 1 and 2 / 24 = GMI

Net Rental Income – lease method; must be supported by a current lease agreement (only acceptable if the rental property does not exist on the previous year’s tax returns)

Gross rental income X 75% - monthly PITI (principal, interest, taxes, insurance) and monthly HOA dues, if applicable = GMI

Alimony / Child Support – income must be supported by a divorce decree, separation agreement or recorded court records (alternatively 12 months of cancelled checks showing regular receipt of payment) verifying 3 year continuance

The monthly amount as reflected on the documents is what you will use for monthly income

How to Review a Profit & Loss Statement

2012-01-30T07:00:00.001-05:00

Profit and loss statements can sometimes elicit confusion among originators, processors and even some underwriters. Here are some helpful tips and information on reviewing a self employed borrower's profit and loss statements.

First, here's an accurate definition of profit and loss statements:

Profit and loss statements are a "net" view of the profit or loss after expenses are removed from business revenues.

Some common traits of profit and loss statements from S-Corporations and Corporations will typically show "wages to officers", "owner salary", "officer salary" or some other name that refers to the amount of W-2 wages which were paid to the owners of the company. Since this is true income earned by the business owner, it should be added back tot he net profit and loss when evaluating the profit and loss statement as long as the owner is also a borrower on the loan.

Some uncommon traits of profit and loss statements is they typically do not account for "depreciation", unlike actual filed returns, therefore, there is no "add-back" feature to this when calculating the profit and loss picture. If, however, depreciation is noted as a line item on the profit and loss statement, it may be "added-back" to the net profit/loss.

Calulating the income figure: net profit and loss + depreciation + wages paid to the borrower/company owner, divided by the number of months represented on the profit and loss statement, divided by the borrower's ownership percentage = the monthly income attributed to the borrower.

Here's a calculation example:

Year-to-date profit and loss dated 1/1/2011 - 10/31/2011; borrower and co-borrower own 100% of the company.

Revenue: $150,000

Total Expenses: $152,000

Net loss: -$ 2,000

Depreciation +$ 5,000

Wages to owner +$ 75,000

Total $ 78,000 / 10 months reviewed = $7,800

Compare the monthly amount to the self employed income analysis. If the self employed analysis is about the same, then all is well. If however, the self employed analysis indicates that the borrowers made about $15,000/month in the previous 24-month average, then the income is declining. At this point, you must compare the profit and loss revenue to the company's revenue for the previous 2 years to see if their receipts are also declining. Also, you must look for other inconsistencies on the first page of the business tax return compared to the profit and loss statement.

For more education and resources, visit our website at www.mortgagetrainingconcepts.com

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Freddie Mac to give unemployed homeowners a break

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Wells Fargo Reaches Settlement with Regulators

2011-12-16T15:58:00.000-05:00

Wells Fargo Reaches Settlement with Regulators

Charlotte, N.C — December 8, 2011

Wells Fargo & Company. (NYSE:WFC) today announced that its subsidiary, Wells Fargo Bank, N.A., reached settlements with the Office of the Comptroller of the Currency (OCC), Securities and Exchange Commission (SEC), the U.S. Internal Revenue Service (IRS), U.S. Department of Justice (DOJ) and a group of state Attorneys General to resolve their previously disclosed investigations into the conduct of certain former employees in Wachovia Bank’s former municipal reinvestment and derivatives group prior to its merger with Wells Fargo.

Wells Fargo is pleased to have fully resolved this investigation of Wachovia Bank. The underlying transactions were entered into in a business that existed at Wachovia Bank, which Wells Fargo acquired in 2008, and involved employees who are no longer with the firm.

The total amount of the settlement is $148,243,013. Under the terms of the settlements, Wells Fargo will pay the settlement amount as follows: $8.9 million to the IRS; $46.075 million to the SEC, $34.518 million to the OCC; and an additional $58.75 million to the state Attorneys General. As previously disclosed, Wells Fargo has also resolved, subject to Court approval, related civil litigation pending in the U.S. District Court for the Southern District of New York for $37 million. The payments will not have an adverse effect on Wells Fargo’s financial results and the settlement will not adversely affect the conduct of any current business of Wells Fargo.

Wells Fargo cooperated fully in this investigation into alleged coordination among market participants in the industry. Wells Fargo does not endorse, ratify or condone anticompetitive activity or other violations of law, and Wells Fargo policies (both currently and during the period in question) expressly prohibit such conduct.

ADDITIONAL INFORMATION ABOUT THE IRS AGREEMENT

Wells Fargo Bank, N.A., successor by merger to Wachovia Bank, N.A., has agreed to a settlement with the IRS under which it will pay $8.9 million for certain regulatory violations of the Internal Revenue Code committed in connection with Wachovia Bank’s and its predecessor’s role in providing or bidding on guaranteed investment contracts, swaps and other contracts with the issuers of municipal bonds or with entities that borrowed the proceeds of such bonds from the issuer thereof or otherwise were the beneficiaries of such bonds. Such issuers are primarily state and local governments but also include school districts, universities, hospitals and charitable organizations.

This settlement agreement with the IRS is entered to resolve violations of the Internal Revenue Code resulting from Wachovia Bank’s and its predecessor’s participation in anti-competitive practices, such as bid-rigging, in the municipal market in connection with certain investment contracts and derivative transactions.

With respect to compliance by the affected issuers with the arbitrage requirements of Section 148 of the Internal Revenue Code, under the settlement agreement the municipal investment and swap contracts associated with a State or Local bond entered into with Wachovia Bank or its predecessors, during the period 1993 to 2006 are deemed to have been entered into on terms which represent the fair market value of such contracts. In addition, payments to issuers of any restitution or settlement fund payments related to such contracts need not be included in the gross proceeds of the related bond issue.

About Wells Fargo & Company

Wells Fargo & Company (NYSE: WFC) is a nationwide, diversified, community-based financial services company with $1.3 trillion in assets. Founded in 1852 and headquartered in San Francisco, Wells Fargo provides banking, insurance, investments, mortgage, and consumer and commercial finance through more than 9,000 stores, 12,000 ATMs, the Internet (wellsfargo.com and wachovia.com), and other distribution channels across North America and internationally. With approximately 280,000 team members, Wells Fargo serves one in three households in America. Wells Fargo & Company was ranked No. 23 on Fortune’s 2011 rankings of America’s largest corporations. Wells Fargo’s vision is to satisfy all our customers’ financial needs and help them succeed financially.

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What You Need to Know About Mortgage Loan Processing

2011-11-18T09:00:00.001-05:00

Many Loan Originators think, "I don't need to know anything about mortgage loan processing....just do whatever needs to be done with the file and send it closing". Sound familiar? Maybe those days were once the norm but today's market dictates that Loan Originators know everything about the processing and underwriting of loans from start to finish. Why? Well, that's simple. Many issues and obstacles can be uncovered in the mortgage processing phase which means Loan Originators need to know what they are and how to uncover it during the application interview.

For one, did you know most lenders are requiring IRS transcripts at least for the most recent year? Mortgage Loan Processors order IRS transcripts and review them for red flags such as self employed income, losses, unreimursed employee expenses and rental income or loss. How about credit inquiries? A general function of Mortgage Loan Processing is to order credit highlights to ensure that any credit inquiries did not result in new credit. If the credit highlight reflects new credit, the payment must be shown on the application and be considered in the calculation of the borrower's debt ratio. Also consider a full verification of employment (VOE). The function may be simple one but Mortgage Loan Processors must ensure the data on a VOE is consistent with W-2s and paystubs the borrower submitted. If the borrower is qualifying on overtime, commission or bonus income, the question on the VOE that asks "is the income likely to continue?" must be answered appropriately in order for the income to be considered as a basis for qualification.

All of this and more can and will affect loan approval so the more you know about mortgage loan processing, the more you can assist and counsel your borrowers as well as set the appropriate expectations.

For more education, valuable resources, job aids and checklists to help you become a better Loan Originator or Mortgage Loan Processor, please visit our website at http://www.mortgagetrainingconcepts.com/. Our Learning Management System will be available shortly and we'll be offering numerous professional development courses and resources to help you succeed. For custom training or consulting, contact Jennifer Taylor directly at 828-215-6709 and/or email her at dt23@charter.net.

USDA Loans: Recent Changes You Need To Be Aware Of

2011-11-11T09:00:00.003-05:00

Part of your product offering as Mortgage Originator should include USDA loans. USDA loans offer 100% financing in geographically eligible areas with liberal household income requirements. Recent changes that affect USDA loans include the added monthly mortgage insurance of .30 bps. The upfront guarantee fee was reduced to 2% for purchases and 1% for refinances which may be financed into the loan.

LTV is calculated based on appraised value not purchase price so there is room to add closing costs and prepaids when the value of a property exceeds the purchase price.

For property and income eligiblity, go to the USDA website for property and income eligibility at http://www.eligibility.sc.egov.usda.gov/ . Here, you will also find the GRH Calculator that will assist you in calculating the total loan amount. Just enter the appraised value, loan amount and guarantee fee. The excel spreadsheet will automatically calculate the total loan amount with the financed guarantee fee.

The manual calculation is simple if you want to calculate the total loan amount. Just divide the total loan amount by .98%. Your sum is the total loan amount (this is when the entire 2% guarantee fee will be financed into the loan).

Want more education? Go to http://www.mortgagetrainingconcepts.com/ or contact Jennifer Taylor directly at dt23@charter.net .

Loan Application Basics: Are You Asking The Right Questions?

2011-11-06T21:55:00.000-05:00

Originating mortgages have changed tremendously over the past several years. Many industry insiders say that it's back to the basics. Not only are we fully documenting our loan files but we must take it a few steps further and ask our borrowers specific questions in order to uncover issues that may impact their loan request.

In this article, we'll focus on borrower income.

Question #1:

Do you have the last two years complete federal tax returns with all schedules and W-2s (for wage-earners)?

Question #2:

Are there any withholdings on your paystubs indicating additional debt or loans at work?

Question #3:

Do you have variable income such as bonus, overtime or commission? (variable income will generally require 2 years history of receipt and a verification of employment to determine average and likelihood of continuance).

Question #4:

If you are commissioned, have your earnings been declining in the last 2 years? (declining income is generally not eligible for FHA financing and poses a big risk factor all other product types).

Question #5:

Are you a contract or 1099 employee? (a 2 year history will generally be required and the borrower will be treated like a self-employed borrower).

Question #6:

Do you report any unreimbursed expenses on Form 2106 on your tax returns? (generally, any unreimbursed expenses on Form 2106 will be deducted from the borrower's qualifying income).

Question #7:

The ordering of IRS transcripts on loan files are becoming more and more prevalent. Do you show any Schedule C (sole proprietor) income or loss? Do you show any Schedule E income or loss? (losses will generally be deducted from qualifying income even on non-borrowing spouses and 2 years of tax returns are generally required).

The income questions above will reveal any issues that may impact your borrower's loan request and prevent last minute "surprises". The answers to these questions will allow you to set the proper expectations with the borrower and resolve any issues that may impact approval.

To get more mortgage education, go to http://www.mortgagetrainingconcepts.com/ .