Step Five – Assets
Assets are the capital component in the 4’C’s of underwriting, the reason this “C” is so powerful the agencies have reviewed thousands of loans and found most people who have the discipline to save money generally are a lower risk to lend too. This is because they don’t push things to limit financially by spending everything they earn so they tend not to take on debts that will cause them to default on the loan. In addition having money in the bank to fall back on in case of job loss, injury, or other emergencies means the borrower won’t fall apart and miss a mortgage payment the first time his car gets a flat tire on the way to work and he buys four new tires.
When you are reviewing assets keep in mind the two main points that you are required to determine.
- Does the borrower have enough qualified funds to close the transaction?
- Does the borrower have enough qualified reserves to close the transaction?
This step is one of the more simple steps but can require a lot of reading and sorting of information to make sure you have accurate numbers. It goes back to “simple” but not “easy” it is simple to read a bank statement but sometimes tracking and explaining the movement of money in and out of account is far from easy.
Things to consider while reviewing assets
- What type of documents are required and are they all present (IE all pages of a bank statement)
- Is the statement within required expiration dates
- Does the borrower own the asset presented
- Is the borrower trying to use business funds
- Is the borrower allowed to use the type of funds presented
- Are there large deposits or transfers that seem unusual
- Are there additional debts payments that are not reported on the credit report
One of the tips I will give here is in step 1 you should have an idea of what the borrower needs to make the transaction qualify in regards to cash to close and reserves. Many times I receive loans where the borrower needs $200 to close on a limited cash out refinance yet the loan was submitted with five different statements with 10 plus pages each statements including $400,000 in a 401k, talk about overkill!
So my advice is review what is in the loan but only “leave in” what is needed. What I mean is review the extra statements looking for fraud, undisclosed borrowing, or other red flags. But if you only need a few hundred dollars to close and the borrower has $5,000 in one checking account, just keep the one checking account and remove the rest from the loan. This will make resubmissions and auditing reviews much simpler!