Written By: Frankie Lacy, Op-Ed Writer
When underwriting a file, there are several ways to make loan notations:
-The comments section on the underwriting transmittal (1008)
-The loan origination system (LOS) notes
-A separate underwriter rationale write up
The comments section of the 1008 is best used to explain special circumstances on a loan file. Comments placed in this area will be viewed by investors. Therefore, it is best to keep this area short, to the point, and professional. An example of a note for the 1008 is:
“The student loan account showing on credit has been omitted because it is paid by the borrower’s daughter. A transaction history from the student loan servicer and 12 months cancelled checks from the daughters account have been retained in the loan file.”
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Loan origination system notes are used for communication between internal parties. For example, if a loan originator wants to advise the underwriter of various file characteristics, they would place their notes here. In addition, when the processor has conversations with loan officers or third party vendors, they will keep a record of those conversations in the LOS notes. Whenever processing orders documentation, such as a credit supplement or written verification of employment, they will also notate the file activity here.
Underwriters should use the LOS notes to document management exceptions or conversations held with management and the loan originator about the loan. For example, if a manager has signed off on a condition, they should notate the rationale for their decision here. If the underwriter discusses a condition with the loan originator and agrees to alternate documentation (other than what is on the conditional approval), this conversation should be documented in LOS notes. This allows other parties who make work on the loan in the original underwriter’s absence to get up to speed.
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Finally, the underwriter rationale is used for very detailed explanations of loan characteristics. Some examples are loan exceptions, compensating factors, and income calculations. Usually this is a document typed separately in Word format and includes a heading with the underwriter’s name, borrower name, loan number, and date. The underwriter rationale is critical to documenting the loan decision on a file.
It is very difficult for an auditor or other third party to follow the logic of a decision if it is not communicated through a write-up. This write-up can also save the underwriter stress later on if there are post-closing investor or auditor questions. Some examples of comments I place in an underwriter rationale are:
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“The borrower is paid an hourly salary, but hours vary from week to week. As a result, UW has used a YTD + last year’s W2 average instead of the standard 40 hour work week. The calculation is as follows: $12,000 (YTD) + $24,000 (2013 W2) = $36,000 / 18 months = $2,000 per month qualifying income.”
“The borrower has a series of large deposits going into the Main Street checking account number 123456. These large deposits are a result of income earned as an independent contractor. This is the borrower’s side business. Schedule C was reviewed for the last 2 tax years and no losses are reporting. This income is not used to qualify due to acceptable DTI ratios without it.”
About The Author
Frankie Lacy - As an op-ed writer, Ms. Frankie Lacy is a 15+ year mortgage industry veteran with extensive conventional mortgage underwriting experience. Topics of Frankie's expertise include: Fannie Mae, Freddie Mac, USDA Rural Housing, underwriting to investor overlays, self-employed borrowers, personal and business tax return analysis, rental income, condos/co-ops/PUDs, and more. Frankie is a Davenport University graduate with a degree in Business Administration.
