Written By: Stacey Sprain
If you’re like me, you like to take FHA Mortgagee Letters and dissect them when they are released, put the content info format that makes most sense to you and completely re-create or break down the information that’s given. I often like to look at the information as if I am reading it from the point-of-view of someone who may not have many years of mortgage expertise so that I can take the info provided by FHA and re-present it in ways that prove the most helpful to those who rely on the information in day to day lending. I also like to read it and make a list of questions that I suspect will arise from the field based on the information given. That’s exactly what I did when I received Mortgagee Letter 2012-3.
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Below is a list of questions and answers I’ve assembled to date to help supplement the recently issued Mortgagee Letter.
FAQS re: Topic #1 - New Requirement for P&L and Balance Sheet for Self-Employed Borrowers
• Can you clarify under what circumstances I need to request a P&L from the borrower? You only need to provide an unaudited P&L and balance sheet if more than 3 months have elapsed since the date of the most recent calendar or fiscal year-end tax return was filed by the borrower assuming the income is not intended to be used for qualifying purposes, but rather will be used to demonstrate business stability. If the intent is to use the income in qualifying, an audited P&L would be required. (Note that most lenders still do not allow the use on income for qualifying unless validated with IRS transcripts).
• What exactly is underwriting going to be looking for when reviewing these P&Ls and balance sheets when they are required? Underwriters will be watching to assure that earnings are stable or increasing while businesses that show a significant decline in income over the analysis period are not acceptable, even if the current income and debt ratios meet FHA guidelines. Underwriters must determine that the borrower's business is expected to generate sufficient income for his/her needs by reviewing the business’ financial strength, including the source of the business income and general economic outlook for similar businesses in the area.
• What exactly is a Profit and Loss Statement and what information is required to be included in a Profit and Loss Statement? A Profit and Loss Statement (P&L), also referred to as a revenue statement, statement of financial performance, earnings statement, operating statement or statement of operations, is a summary of a company’s profit or loss during any one given period of time, such as a month, three months, or one year. The income statement records all revenues for a business during the defined period, as well as the operating expenses for the business.
The basic categories considered in a profit and loss statement should include sales receipts, cost of goods sold, itemized expenses and gross profit, at minimum.
• What should a Profit and Loss Statement look like? Keep in mind that we will see many different possible formats for profit and loss statements. There is no right or wrong format as long as the pertinent information is included within the document.
• Is there anything I can provide my borrower in the form of a “template” in case my borrower doesn’t use an accountant who can provide a P&L? You’ll find a wide variety of P&L templates available on the web. Below are links to a few of them.
o http://office.microsoft.com/en-us/templates/CT010117276.aspx?tl=2#pg:2|ai:TC001113238|
o http://office.microsoft.com/en-us/templates/monthly-income-statement-TC1...
o C:\Documents and Settings\User\Local Settings\Temp\TCD16F8.tmp\Operating expense analysis.xlt
o http://www.freebusinessforms.com/free-business-templates/Free_profit_and...
o http://www.freebusinessforms.com/businessfinancial/profit.htm
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• What exactly is an audited P&L and under what circumstances would we need one? An audited P&L is a personal financial statement (for a sole proprietorship) or business financial statement (for corporations, limited liability companies and partnerships) which is reviewed and authenticated by a certified public accountant. They are very costly and not used very often for that reason. (I’ll be honest- I’ve NEVER seen one in the near 25 years I’ve been in the business!) You would only need an audited P&L when you have to use the income for qualifying and the income cannot be validated any other way.
• What exactly is a balance sheet and what information is required to be presented in a balance sheet? A balance sheet is a statement that summarizes the company’s assets, liabilities and shareholder’s equity for a specific point in time. The balance sheet must follow the following formula: Assets = Liabilities + Shareholders' Equity
• What should a Balance Sheet look like? We will see many different possible formats for balance sheets. There is no right or wrong format as long as the pertinent information is included within the document.
• Is there anything I can provide my borrower in the form of a “template” in case my borrower doesn’t use an accountant who can provide a Balance Sheet? You’ll find a wide variety of Balance Sheet templates available on the web. Below are links to a few of them.
o C:\Documents and Settings\User\Local Settings\Temp\TCD1667.tmp\Income statement 1 year.xls
o C:\Documents and Settings\User\Local Settings\Temp\TCD166D.tmp\Balance Sheet.xlt
FAQs Re: Topic #2 – Collections, Disputed Accounts, Public Records
• Can you clarify the circumstances under which a disputed account(s) or disputed collection account(s) can remain on the credit report with no further action required? The following three characteristics must be present.
1. AUS must render Accept/Approve findings, and
2. The total outstanding balance of all individual or multiple disputed credit accounts or disputed collections with singular or cumulative balances must be less than $1,000, and
3. The disputed credit accounts or disputed collections must be aged two years from date of last activity as indicated on the most recent credit report.
• So what are the options for the borrower if the disputed account(s) or disputed collection(s) do not meet all three of the above requirements to remain ‘as is’ without further action? Mortgagees must provide documentation in the case binder to show the disputed accounts or disputed collection accounts are resolved, verified as not a debt not belonging to the borrower that arrangements have been made for repayment, or have been paid in full. These options are described below.
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1. The borrower can remove the dispute status of the disputed credit account or disputed collection, we can obtain new credit and re-run AUS, or
2. The borrower can enter into or provide evidence of a repayment agreement with the creditor showing no less than three months satisfactory payments have been made timely according to the agreement and must qualify with the monthly payment amount, or
3. the borrower can pay the disputed account or disputed collection off prior to closing with an acceptable source of funds, or
4. The borrower can pay off the disputed account or disputed collection at closing with evidence of acceptable source of funds, payoff statement from the creditor, payoff on the HUD 1 and check disbursed from the title company to the creditor, or
5. the borrower can provide evidence that the disputed account or disputed collection resulted from stolen identity, theft or unauthorized use with such documentation as a filed identity theft report and/or police report,
• Are medical collections to be included in these new requirements? Yes. Medical collections are not exempt from these new requirements. You must consider unpaid medical collections with these new requirements.
• If a non-purchasing spouse has outstanding collections and/or disputed accounts, would the unpaid balances need to be considered in the cumulative total? Answer: If the property being financed is in a community property state, disputed accounts and collections with outstanding balances of the non-purchasing spouse would have to be considered in the $1,000 cumulative limit. The non-purchasing spouse’s debt would not be included if the borrower can provide documentation such as a copy of a marriage license to show the debt was incurred prior to the marriage, or a copy of the state’s law showing that community property did not apply to debts incurred prior to the marriage together with an attorney’s opinion letter stating that the borrower was not responsible.
• Let’s say we have a case where a borrower has two disputed accounts, both aged for two years totaling $1,050 (one for $900 and a second account for $150). Payment arrangements have been made for the disputed account with an original balance of $150. The borrower made three payments of $25 each in accordance with a payment arrangement, leaving an unpaid balance of $75. Does the borrower need to pay in full the second disputed account of$900? No, the outstanding cumulative balance is less than $1,000 ($900 + $75).
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• Are the balances of unpaid charge-off accounts included in the $1,000 limit? No, unpaid charge-off accounts are not included in the $1,000 limit.
• If there is a dispute on an authorized user account, is that exempt from the cumulative balance? No. A disputed account is only exempt from the cumulative balance if documentation is provided showing the dispute is a result of identity theft, credit card theft, or unauthorized use.
I hope you find these FAQs helpful as you tackle the new underwriting requirements that were announced in Mortgagee Letter 2012-3 which are effective for cases assigned on and after 04/01/2012.
About The Author
Stacey Sprain - As an NAMP® staff writer, Ms. Stacey Sprain is currently a NAMP® member in good standing, and is 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. If you would like to become a volunteer writer for us, please email us at: contact@mortgageprocessor.org.
