Friday, April 18, 2008

DU Self employed vs 1099

When I am out calling on brokers I run into this dilemma all the time. Many are under the impression if a borrower receives 1099 income they are self employed. They maybe but many times they are not. See Fannie Mae's definition below defining self-employed borrowers:

"We consider any individual who has a 25 percent or greater ownership interest in a business to be self-employed. A number of factors need to be considered in underwriting a self-employed borrower, some of which may be beyond the borrower’s control (although they still have a significant effect on the borrower’s business). The lender should analyze each of the following factors before approving a mortgage for a self-employed borrower:

the stability of the borrower’s income;

the location and nature of the borrower’s business, the demand for the product or service offered by the business, the financial strength of the business, and the ability of the business to continue generating sufficient income to enable the borrower to make the payments on the requested mortgage; and

the marketability of the property that is security for the mortgage as a private residence (rather than as the location of a business), since the property could be the source of repayment for the mortgage should the borrower’s business fail.
Because income from self-employment may be unpredictable and the business owner often is personally liable for the business debt, self-employed borrowers tend to default at a much higher rate than other borrowers. For this reason, we usually require the lender to obtain a two-year history of the borrower’s prior earnings as a means of demonstrating the likelihood that the income will continue to be received. However, a person who has a shorter history of self-employment—12 to 24 months—may be considered, as long as the borrower’s latest federal income tax returns reflect the receipt of such income for a 12-month period and he or she has a history of receiving income at the same (or a greater) level in a field that provides the same products or services as the current business or in an occupation in which the he or she had similar responsibilities to those undertaken in connection with the current business. In such cases, the lender must give careful consideration to the nature of the borrower’s business, the demand for the service or product, the borrower’s level of experience, and the amount of debt the business has."


A 1099 borrower has the same documentation requirements as a self employed borrower. So why does it matter if they are not self employed? When you run a loan through DU and mark yes, the self employed borrowers taken on an additional risk. If you mark no many times you will get an approval vs. yes. This doesn't mean you should circumvent the transaction and say they are not when they are but don't mark the box if they don't own 25% of a business.

Shirley Nault has been a mortgage professional for over 20 years. Visit her other mortgage web sites go to www.naultfhatips.blogspot.com or www.mtgview.blogspot.com

Thursday, April 17, 2008

DU Tip "Potential Red Flag Messages"

Why can some brokers get a loan approved and some can not? There are probably more reasons than we would want to know, but one reason is knowing how to use DU or LP. Here is one more DU tip:

When using DU if you do not get an approval review your feedback for the reasons that you may be giving the non approval. If the reasons are DTI, reserves etc. and there is anything you can do to eliminate the risk try this first. If you still don't have an approval notice if your Feed back has any "Potential Red Flag messages".

If you read the DU Manuel it says "Du can provide a number of potential red flag messages that are designed to help our customers detect inconsistencies in loan casefiles as well as potentially fraudulent transactions. For a list of these messages as well as information on what causes DU to return each potential red flag message and Fannie Mae's recommended approach for reviewing the information when each of these messages is received, see the DU Potential Red Flag message matrix. The matrix is available through efanniemae.com as well as the DU Help Center (by searching on the words "red flags") Lenders can contact Fannie Mae for help.

Note: The appearance of these messages does not affect the underwriting recommendation from DU. Rather they are designed to help lenders detect inconsistencies and potentially fraudulent transactions. Furthermore, the absent of any of these messages doesn't not indicate or imply Fannie Mae's acceptance of the data submitted to DU including the appraised value."

Okay that is what FANNIE says, but that has not been my experience. Very often when I see a Red Flag and if it is something that I can address such as the value not being there and I reduce the value I get an approval. My suggestion if you do not get an approval and you have a Red Flag try to address that issue and rerun your loan through DU and you will usually get an approval.

DU will be having web trainings next month take some time and sign up

I want my brokers to be as knowledgeable as possible on DU/LP so you can close more loans. The training is for the new Version 7 DU.

Also Version 7 DU will be more conservative than the current version so it will be worth your while to take these trainings

Shirley Nault has been a mortgage professional for over 20 years. Visit her other mortgage web sites go to www.naultfhatips.blogspot.com or www.mtgview.blogspot.com

Friday, April 11, 2008

Bonus and Overtime with DU (Conventional)

Bonus and Overtime - DU will recommend one of the following
Verbal VOE
One Pay stub and telephone confirmation (or in lieu of telephone confirmation, an additional pay stub dated within 30 days of closing) or
One pay stub, telephone confirmation, and the previous year's W2
Income calculation:
When using a verbal VIE, the lender just determine that the stated bonus and overtime income used for qualifying purposes is reasonable based on the borrower's occupation, tenure and title.

When using a pay stub that reflects YTD bonus and overtime income, the bonus and overtime income must be annualized (divided by 12). If the lender choose to average the bonus and overtime over a longer period of time, additional documentation must be provided. It may also be necessary to obtain additional information or documentation from the borrower to establish the stability of the bonus and over time income.

It could sometimes be in the borrower's best interest to provide more documentation then what DU ask for. The required calculation including annualizeing the YTD from a pay stub will decrease the bonus/Overtime substantially if the borrower is in the first-mid late year.

Please, Please if you do get the verbal waiver DO NOT PROVIDE ANY INCOME DOCUMENTATION! The underwriter will make you meet the manual underwriting guidelines if you do.

Wednesday, April 9, 2008

Commission Income for Conventional loans W/DU

DU TIP The Du guide says that there is no stated minimum history requirement for commission income that equals or exceeds 25% of the borrower's employment income. However, If the documentation level recommend by DU is one or two years personal federal tax returns, at least six months of commission income must be documented on the filed tax returns for it to be used for qualifying purposes. It gives an example that if Du ask for one year tax returns you and it only shows 6 months commission you would divide by 12. I would assume than if it ask for 2 years you would divide by 24 months.
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