When I was in school if you asked me what my favorite subject was I would have told you math. Not really because it was my favorite, but it was my “least hated” subject anyway. The reason it made my favorite list is math has a nice way of being absolute in most cases. Put simply, two plus two always equaled four and if you had any other answer but four, well you were wrong. Unlike English class when my work was graded and returned to me, the paper would be full of red marks of corrections such as “wrong pronoun” and “Use Than Not Then” even when the teacher pointed out my errors I still was lost on what was wrong!
Over the years I have grown to appreciate math, one of the main reason’s is my algebra teacher explanation of algebra to me and the class. He said “you will use algebra every day, for instance if you want to know how much gas money you will need to visit your girlfriend you will take MPG of your car, and the current price of gas, and this will produce the answer of how much gas money you will need to have…. and THAT is ALGEBRA!”. Little would I know in seventh grade how accurate my algebra teacher was and how much I would use all types of math throughout my life.
Fast forward twenty plus years into my mortgage career, and those basic math lessons still apply today. The one I would like to talk about is the importance of “show the math” in regards to calculating income. Most of your borrowers (over 60%) will be employed borrowers, and this percentage will go up if you underwrite government loans. If most of the borrowers we work with are employed borrowers, it is easy to get lulled into “mental coma” for these borrowers thinking the math is “easy” and no reason to complete all math needed (or showing the math). When in reality if you completed all the math required it would greatly increase your quality as an underwriter (and increase your approvals in you work in sales) with little to no effect on the speed in which you can complete a full loan review on your initial underwrite.
Top 3 Reasons Why All Underwriters Should “Show The Math”
#1 – Your underwriting quality will improve
When I worked as a recourse auditor you would have been surprised on how many buy-back loans came across my que because underwriters would use 26 week pay plans instead of 24 week pay plans. So a simple borrower who earned a $2,000 semi-monthly, would be qualified using $2,000 bi-weekly and our ratio’s would become unsalable over this “minor” mistake. This could have been easily stopped by “showing the math” on the Form 1008. Let’s review what math you should be doing on every file, so that you can see how completing and “showing your math” will improve your quality.
These are the questions that must be answered in “math form”
- What should the borrower earn?
- What is the borrower actually earning?
- What has the borrower earned?
In this example we will use a hypothetical case in which the file contains one paystub. This example paystub showed the borrower working 40 hours in one week and earns $25 per hour. The paystub is dated June 30th and the borrower’s year to date income shows $21,000 earned. This $21,000 is all base pay no overtime, commissions, or bonus have been earned by the borrower. We have also received a 2015 W-2 for $43,000 and 2014 W-2 showing $38,000 per year.
1) Question one “what should the borrower earn”? The file was presented with one paystubs showing the borrower working 40 hours in one week. This would lead me to assume the borrower works full time (40 hours) every week.
$25 per hour x 40 hours x 52 weeks = $52,000 / 12 months = $4333.33 per month
Many underwriters stop here, and this is a big problem, because a paycheck like this is easy to “fool” us into thinking the borrower works full time and earns $4333.33 per month.
2) Question two “what is the borrower actually earning?”.
The borrower’s paystub shows $21,000 as of the pay period ending on 06/30. $21,000 / 6 months = $3,500 per month.
This number is almost a full 20% below what he borrower should be earning if he was working full time.
3) Question three “What has the borrower earned”.
To complete the full and proper review of an employed borrower we have to take this last step. Please note in this example we are looking at the YTD for 2016, the 2015, and the 2014 income. But if your AUS findings or guidelines require less then you should only evaluate the years required.
$21,000 YTD / 6 months = $3,500
$21,000 YTD + $43,000 2015 = $64,000 / 18 months = $3,555.56
$21,000 YTD + $43,000 2015 + $38,000 2014 = / 30 months = $3,400
At this point you have all the data you need to make a decision. And the math you need to show and confirm your income qualified.
This borrower appears to work full time on our first calculation but further math shows the borrower works variable hours or has received a large pay raise very recently. Since the file contains no explanation or evidence for a recent pay raise the income we would use to qualify would be the 30-month average of $3,400 per month.
And now the important part… show your math on the Form 1008.
Here is an example of what I would enter on the Form 1008:
Borrower earns salary of $25 per hour, YTD and previous year’s show the borrower does not work a full 40 hours. UW is using 30 month average to qualify of $3,400 per month. ($21,000 YTD + $43,000 2015 + $38,000 2014 = / 30 months = $3,400).
All income evaluated shows ($21,000 YTD / 6 months = $3,500) and ($21,000 YTD + $43,000 2015 = $64,000 / 18 months = $3,555.56)
#2 – Your underwriting speed will improve
There are a few areas that you can gain major speed by following the “show the math” method. One of the biggest time savers will be in your condition review. By having your income math written out on the Form 1008 will save a significant amount of time each and every day. As you can see from the first example we laid out, even a borrower that only earns base pay can easily have the income miscalculated.
Let’s use another more slightly more complex example. If you have a commissioned borrower that you calculated the math on your initial underwriting review on June 10th using a VOE dated June 1st, and 30 days later and the loan officer sends in an updated VOE dated July 1st.
Which of the following Form 1008 examples do you believe will take less time to work with on your condition review?
Form 1008 Example 1
Borrower John Smith’s income is commission underwriter commission income to qualify of $4637.93 per month.
Form 1008 Example 2
Borrower John Smith’s income is commission, underwriter used 29 month average of $4637.93 based on the following: 2016 YTD as of 06/01 commission of $25,000 + 2015 commission of $57,500 + 2014 commission $52,000 = $134,500 / 29 months = $4637.93 per month.
Of course the answer to the question is example two, and the ironic thing is you had to complete the same math and take the about the same amount of time to write both examples on your Form 1008. The big difference now is that with the new VOE you have to spend more time doing the same math as you completed four weeks ago due to the lack of information in example 1! I know this seems minor but these minor issues will add up to big time burners day after day!
This same time burner will be experienced on any type of variable income, net cash flow of subject, REO income review, unreimbursed expenses, and even on basic full time employed borrower’s income calculations. The amount of time burning goes up based on each additional borrower you have and how many types of income each borrower has on the file!
The other major time burner will occur during your auditing process, imagine the time spent re working a loan that has a borrower with a job with variable income, one piece of rental property, and a small schedule C loss. We could even make the argument that IF your Form 1008 showed how you arrived at your final income, this might have avoided the email from QC asking you to explain your income in the first place.
Some mortgage companies have underwriting teams work on their loans, these teams work hand in hand to fully underwrite the loans and clear the conditions. As the loans cycle back through the process until they are ready for closing, many hands can handle the same file. This underwriting team is typically made up of three to six underwriting team members. The amount of time and money that would be wasted in company designed to underwrite loans in this fashion without showing the math would become exponentially higher in this type of system.
#3 – Your customer service will improve
This reason alone should be justification enough to “show the math”! I can tell you from personal experience that I have spent hundreds if not thousands of hours typing emails back and forth with my sales team due to one simple question found on countless numbers of emails.
“Dear Underwriter, did you include the overtime (or bonus, or commission, or second job income) when you were working on the loan, we thought the income was X, but you had it much lower at Y”.
Because I do my show my math now (but took my first 3-5 years of underwriting to discipline myself to show the math) this number of wasted hours of production would be significantly higher without the change in my underwriting
The reason the reason this saves me time are twofold. First, my Form 1008 and approvals contain the detailed breakdown of the income I used so the sales team knows what was used to qualify. Second, when I do receive this email, I can simply “cut and paste” my calculations to show that I have done everything I can to approve the file.
Due to these detailed emails, that only take a minute or two to create, we can change our focus from “how did you get the income” and work together to find solutions to get the borrower approved. For example, getting more information about the borrower’s income to support using more types of income (such as overtime), or paying off debt to qualify the borrower.
Bottom line on this one, a few minutes of typing pays back big in your business relationships!
As we wind down this blog, as promised in the title we wanted to take just a moment of your time to tell you about a tool that will save you even more time if used daily. This tool is UberWriter, you can try it free with no credit card needed at www.uber-writer.com. With UberWriter you take a few seconds and enter in all the numbers and UberWriter will do all the heavy lifting and calculate your income every way possible in less than 2 seconds. UberWriter will give you a PDF report that fully breaks down the borrowers’ income and can be easily uploaded to your paperless imaging system. We believe this tool is the ultimate in “showing the math”!
That is all for now I sincerely hope this information will help you increase quality, increase production, and help establish better working relationships at your company.