Mortgage Lending's Incurable Plague

Anyone who has ventured into the pre-approval process has been exposed to the disease known as “Redundantitis,” which has spread furiously through the lending industry. The market meltdown of recent years was followed up by a strain mutation that seems impervious to any administered dose of logic. All unwary applicants exposed to this find themselves in a seemingly endless rat wheel of paperwork required to feed this all-consumer of reason.

For the purpose of this discussion, let’s take into consideration what’s required to prove one’s “ability to repay” a loan he or she is seeking. A copy of a pay stub and bank statement seems reasonable to most applicants as proof of what they are paid, and what actually finds its way to their possession via deposit to a bank account. However, in the redundatitis stricken realm of mortgage lending, that’s considered merely a good start — hardly proof of one’s ability to repay. To meet the requirements, that first pay stub will need to be accompanied by an additional pay stub in order to show a full 30 days consecutive income. Additionally, the W-2 from the previous two years, complete Federal tax returns for both recent years, and a verification of employment completed by the employer all round out the document side of things.

The need for pay stubs is fairly self-explanatory, but let’s discuss the parts that are reviewed: The year-to-date income is used to calculate what has been received to date and whether or not it’s representative of what was presented on the application. The hourly, salary, or whatever form of base income is also compared to the year-to-date average in an effort to verify that there’s no discrepancy in the sum that would need explanation (leave without pay, layoff, extended vacation, etc.).

The W-2s show whether or not there is a consistency in the income over a longer period. Fluctuations in the income are seen differently: An increase year over year is looked at very favorably, whereas one with a decrease year over year can be viewed very negatively — especially if these pay stubs continue the downward trend.

Moving on to the taxes. Those with additional income or losses/expenses declared on the various schedules available face increased scrutiny when it comes to bottom line qualifying income. Having a side business is a great way to offset taxes, but when qualifying for financing, funds claimed as used for business expenses are funds lenders cannot be calculated into the income vs. debt ratios as usable for repaying a loan. We have seen hundreds of ways taxpayers and CPAs have skinned this write-off cat. One must keep in mind that what you declare as a cost to do business cannot be used in any form as income for qualifying, no matter how it’s explained (as always, there are a few exceptions to this hard-and-fast rule).

Now for the verification of employment. Even though the pay stub and W-2s come from the employer, we cannot accept that as gospel truth. Courtrooms have been filled with those who’ve used technology as a tool to manipulate documentation and make fiction look like fact. The creativity of the unscrupulous has increased the need for additional third-party verification. The employer will be requested to provide a summary of gross, net, and withholdings for previous years, as well as up-to-date income for the current year on a form provided by the lender. And it doesn’t stop with breaking down the income for the purpose of matching it up with all the other redundancy. The employer must also provide dates of employment and the probability that such employment has some shelf life left. This all gets compared and, by damn, it had all better match or there will have to be an extensive, acceptable explanation as to why not.

By this point, one would believe that this would all amount to sufficient evidence. Not so fast. Before any funds can move from the lender to the closing table, another person is charged with contacting the employer and confirming the applicant still works for the employer. “Why in the name of all things holy?” you may ask. Well, just because the applicants probability of employment was “Excellent” a week ago doesn’t mean that situations have stayed the same. Proof will be required in some form or another until the second the cash register is closed and the change is pulled out of the cashier’s ratchet grip. Then, once the employment is verified, a verification from the IRS is also required.

This is referred to as Tax Transcripts, and is received with the submission of an applicant signed IRS form 4506T. The information on the 4506T must match exactly with what was submitted on the taxes, or a response rejecting the request will be returned. With a successful request, the transcripts are released and the lender compares the Federal Returns with the transcripts to verify that the information matches. This is yet another symptom of the epidemic that threatens powers of deduction and reason. Much like any of history’s global plagues, the unhealthy practices of the few now infect the many.

This shouldn’t strike a reader as new information. The misery that accompanies a successful loan closing is shared by all involved in the process. The lender you choose gets to be the bearer of countless requests for paperwork, all while the applicant is bombarded with “We can do it better, cheaper, with a bigger smile on our face and not to mention we are better looking,” messages from the enormous marketing engines of other lenders, displayed on countless billboards, emails, commercials, and pop-ups. The end result is that there’s no immunity to this ailment, it can creep its way into any transaction without warning. You have officially been warned.

DISCLAIMER: No statement on this profile or contained in this article should be considered a commitment to make a loan. Loans are subject to borrower qualifications, including income, property evaluation, sufficient equity in the home to meet LTV requirements, and final credit approval. Approvals are subject to underwriting guidelines, interest rates, and program guidelines, and are subject to change without notice based on applicant’s eligibility and market conditions. Refinancing an existing loan may result in total finance charges being higher over life of loan. Reduction in payments may reflect longer loan term. Terms of the loan may be subject to payment of points and fees by the applicant. Equal Housing Lender. SecurityNational Mortgage Company Inc. NMLS# 3116. Any amounts, figures, payments or loan terms stated are based on continually changing markets, rates, loan programs and borrower specific qualifications, and subject to change without notice. See loan officers featured for a personal consultation and accurate pricing.

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