Written By: Frankie Lacy, Op Ed Writer
Often, asset review is a straightforward piece of the loan analysis process. Borrowers submit recent checking and savings account statements to verify funds to close. The underwriter will review the statements for large deposits and insure the most recent balance is used to qualify. However, many asset statements have “hidden” information within that requires further analysis.
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One extremely common asset type that can lie hidden within a simple checking or savings account is a gift. Gift funds are considered a separate asset type, even though they are often placed into liquid depository accounts. The AUS findings report reads them as a separate asset type and agency guidelines require specific documentation to verify gift funds.
As a result, it is important to carefully review all deposit activity in checking and savings accounts. The underwriter must verify that all funds deposited into the account belong to the account holders. If the source of funds is an outside party and exceeds the large deposit thresholds of 50% of qualifying income (as defined by Fannie Mae), the underwriter must question these funds and get the source. If the source of the funds is a gift, a gift letter, proof of relationship, and evidence of donor ability to gift may be required.
Borrowers may also supply statements from wealth management, investment portfolio, and individual retirement accounts (IRA). These assets are frequently mislabeled because the accounts often hold several different asset types under one umbrella. The underwriter must carefully review all pages of the statements to understand what kinds of accounts are included in the overall portfolio.
A common mix is cash account, stocks or mutual funds, and retirement assets. Each of these account types are treated differently for residential mortgage qualification purposes. Cash accounts may be used at 100% of their net value. Stocks and mutual funds must be discounted by 30%. Retirement funds must be discounted by 40%.
If the borrower has submitted a statement with mixed assets that are labeled as an IRA, many underwriters will discount the entire portfolio mix by 40% for the most conservative approach. Similarly, 401K funds from a borrower’s employer retirement program must be discounted at 40%. If the account is a 401K account, the underwriter must also condition for terms and conditions of withdrawal.
This is because many 401K accounts have strict stipulations regarding withdrawing funds for personal use prior to retirement age or termination of employment with the company. Funds that are derived from retirement assets and stock assets must be liquidated prior to using them to source funds to close.
It is critical to make all of these distinctions between different asset types, not just to calculate the correct qualifying percentage, but for data integrity on the loan application and the AUS. All information used by the underwriting engine must be properly labelled for an accurate and valid findings recommendation.
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Each asset type will return a different message on the AUS findings. For example, checking and savings accounts will require the most recent two months statements on a DU file. In contrast, a retirement asset only requires the most recent statement. Ultimately the underwriter is responsible for completing a careful review, asking questions, and properly documenting all asset types.
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.
