Written By: Stacey Sprain, Op-Ed Writer
It all starts with the loan application and quite frankly, if the 1003 isn’t thorough and accurate from the get-go, it can stop your file dead in its tracks once it hits underwriting. From an underwriting standpoint, nothing is as important as a complete and accurate loan application because the 1003 is the window to the file; it’s the “book” that tells the story.
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This week, I spoke with some of our underwriters to get a list of the most common 1003 errors they see that tend to cause issues and potential delays with their ability to efficiently underwrite the file. I address each area by category with comments below.
Most Common Errors- 1003 Page One
• Top of Page One: The instructions at the top of Form 1003 are consistent with the permissible inquiries that creditors are allowed to make under the Equal Credit Opportunity Act (ECOA). ECOA permits the lender in a community property state to obtain information regarding the liabilities of a borrower's spouse even though he or she is not applying for the mortgage and his or her income will not be considered for loan qualification purposes. This section should be completed when an unmarried borrower is applying for joint credit with another individual and when a married borrower is applying for individual credit without consideration of his/her spouse’s income or assets. Completion of this section immediately points out to an underwriter whether they can expect another non-married borrower to be included for credit consideration or if they need to underwrite the file keeping in mind that the borrower is married but spouse is not on the loan.
• Amortization Type: The “other” box should only be checked when the loan product is a balloon. Most all other cases fall under fixed rate or ARM categories.
• Purpose of Loan: Construction to Perm should only be checked if the intent of the loan is to modify existing construction financing to permanent financing. For lenders taking the position of an “end loan” by paying off a temporary construction loan, the loan must be structured as either a purchase or refinance transaction, dependent upon how long the borrower(s) have owned the lot/property.
• Complete This Line if this is a Refinance Loan: Often when the purpose of the loan is for refinance, this section is left blank or is incomplete. These details are important to underwriting because it allows the underwriter to quickly identity certain characteristics that could determine varying guideline requirements for a refinance.
o Year Acquired, for example, can tell the underwriter how long the borrower has owned the subject property. That data is important to establishing whether the loan meets minimum product seasoning requirements and whether or not original purchase price or current appraised value should be used to determine the loan-to-value and/or combined loan-to-value.
o Original Cost: This field is relevant for situations when the borrower has not owned the property long enough to use current appraised value to determine the loan-to-value and combined loan-to-value. It also gives underwriter a quick idea of whether or not value has declined on the property since it was originally purchased when the underwriter sees the current market value on the appraisal.
o Purpose of Refinance: This field should indicate whether the loan is a “cash-out” or “limited cash-out” transaction and is relevant because it determines the maximum amount the borrower can be refunded at closing. Cash-out most often is not limited whereas limited cash out could restrict the amount of cash back to no greater than $500 on government loans or the maximum of 2% or $2000 for conventional loans.
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o Describe Improvements: I never see anyone fill these fields out yet so often we do see recent improvements listed on the appraisal. It’s important to ask the borrower if any recent improvements have been made to the property so that the underwriter can make sure the new improvements are specifically addressed and valued in the appraisal and so that comparables are fair in comparing new and superior upgrades made to the property. “Improvements to be made” is a field that is relevant only when the borrower is pulling cash out that will be used specifically to make improvements to the home.
• Title will be Held in What Name: This field is often not completed accurately or is completed in error. If the loan if closing in the name of a trust, for example, this field should indicate the name of the trust that will be listed for title. If the borrower is married yet obtaining the loan individually without the spouse listed, this field should indicate the borrower taking title as sole and separate property. It’s important to establish exactly how the borrower intends to sign the settlement documents- Will he/she use a middle initial or spell out their middle name? Is the borrower a junior or senior or II, III, IV that they use to sign their name on legal documents? These are all details that should be established up front with loan application. Will the borrower be assigning a power of attorney to sign on his/her behalf?
• Estate will be held in: I don’t think I’ve ever seen this field completed showing “leasehold” and the leasehold expiration date when the property is held in leasehold. Often that detail may not be known at the time of application but is learned at some point in processing. As soon as it’s determined the property is leasehold, that field should be updated to reflect the accurate information for the final 1003 to be signed at closing. Most often this field should simply indicate “fee simple.”
• Borrower’s/Co-Borrower’s Name: Be sure to establish up front whether the borrower uses his/her middle initial, full middle name, a hyphenated last name, Jr., Sr., or II, III or IV etc. when signing legal documents. This field should indicate the borrower’s legal name.
• Social Security Number: It’s of utmost important to make sure the SSN entered is accurate. Check and recheck the data entry of this field at application, prior to requesting credit or running AUS.
• Date of Birth: It’s of utmost important to make sure the DOB entered is accurate. Check and recheck the data entry of this field at application, prior to requesting credit or running AUS.
• Yrs. School: This field isn’t always relevant but it can be for certain situations. For borrowers that show a history of “job-hopping”, who have recently graduated from college and started employment, borrowers who have changed fields of employment and borrowers in high ranking professions, this field can be important to establishing the details the underwriter needs to underwrite the loan properly.
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• Marital Status: This field is particularly important when a married borrower applies for individual credit without consideration of the spouse because often it’s determined later in the process as explanations are sought out concerning occupancy and credit, that a borrower may be separated, intending to separate or on the verge of divorce. These factors can be important for validation of occupancy of the subject property in certain situations.
• Dependents: Often this field is missed or left blank yet withholding allowances, tax returns and/or tax transcripts disclose dependents. This field is relevant for VA lending so that residual income can be calculated accurately and so that child care expenses can be considered as required. It’s also relevant when using child support income to qualify or when omitting child support obligation from qualifying debts.
• Present and Former Addresses: These fields are particularly relevant and can often open a window of concern to fraud or misrepresentation. In my own experience I have found that every single case of validated fraud started with comparing the information in these fields to the address history reported on the borrower’s credit report. When there is a straw borrower, often this is a big tip off. If the loan application reflects the borrower’s current addresses for the state of California, the credit report shows different California addresses or addresses for another state yet the borrower is purchasing a property in Georgia, red flags jump up immediately. It’s important to assure these fields are filled out accurately, that the information in these fields is compared to the addresses shown on the credit report and on other file documentation. When things don’t add up or there are discrepancies, you need to request explanation from the borrower. Sometimes it will open further investigation and sometimes it will be discovered that a simple oversight occurred and that all is well once the details are ironed out and corrected on the 1003.
• Name and Address of Employer: Often the address is left off the 1003 or the address entered is the corporate address for the employer as taken from the paystubs or W2s in the file documentation. Make sure that the employer address reflects the borrower’s physical work location and not just the employer’s main office or corporate office address. This is important because it can help establish whether the borrower works from home (potential expense write offs), whether or not the employer actually has an office in the same area the borrower is purchasing owner occupied property or if the employer exists at all. I determined occupancy misrepresentation on one file I recall because a large employer with a corporate address was entered for New York, New York yet the borrower was purchasing owner occupied property in Atlanta, Georgia. This led me to use online resources to look up to see if the employer had offices in Atlanta. I determined they did not. This lead me to ask the borrower how he would occupy property in Atlanta when his employer was in New York City, seeing that the type of job he had was not the type of job that could be done from a home office. I determined the transaction needed to be done as a second home because the borrower actually planned to remain in his apartment in New York City which lead to having to qualify him with the current rent plus the new second home PITI and he did not qualify for both payments. The loan had to be declined.
In another situation I recall, the borrower’s employer address indicated San Francisco, CA yet he was purchasing property in a town in GA. Again, I checked to see if the employer had an office in GA and they did not. This lead to asking the borrower to explain how he would be employed in GA when the employer did not have an office there. The explanation uncovered that the borrower, who provided salary pay documentation in the file, was going from being a W2 salaried employee to a 1099 sub-contractor who would be able to work from home and earn commissions going forward. Because the borrower has no history of commission earnings or taxes filed based on 1099 pay, we had to decline the loan.
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So these situations demonstrate the importance of listing the actual work location on the 1003 versus the employer’s corporate office address.
• Self-Employment: It’s important to assure the self-employment box is checked when the borrower owns 25% or more of the business for which he/she earns income. This detail determines documentation and underwriting requirements for the underwriter so if the field isn’t checked when it should be checked, it can cause confusion and lead to delays with having to condition for further documentation such as full tax returns, more transcripts, etc.
Stay tuned for next week’s article which will cover the common errors and mistakes underwriters see with page 2 of the 1003!
About The Author
Stacey Sprain - As an op-ed writer, Ms. Stacey Sprain is currently a NAMP® Certified Ambassador Loan Processor (NAMP®-CALP). With over 15+ years of mortgage banking experience, Stacey is also a Quality Control Manager for a major mortgage lending institution.
