Have you noticed that it is harder to get deals financed these days? (Don’t answer that, it’s a rhetorical question.) The reasons are legion, from stricter credit scoring models, to tighter loan-to-value and debt-to-income ratio requirements, to higher asset requirements, to underwriter review of 100% of borrower tax transcripts. The cumulative effect is that an underwriting process that used to resemble getting your earnings temperature taken is now the equivalent of a financial colonoscopy. And just like in the medical field, if you look at something long enough and closely enough, you’re bound to find something to fret over.
So, what are borrowers and/or Realtors to do whose fortunes rise and fall upon expectations embodied in lender pre-approval letters? (To say nothing of the equally problematic (if harder to measure) missed opportunities related to qualified borrowers who never get anywhere because their loan officer doesn’t understand how to document legitimate income!) Of course, your loan officer doesn’t have to be a CPA to provide adequate service, but you are doing yourself a disservice if you are not partnering with someone who is very comfortable navigating individual, corporate, partnership and Limited Liability Company tax returns. (I know it’s self-serving, but, like they say about bragging, “It’s not bragging if it’s true” – and, I would add, widely relevant.)
This is not a low bar that can be met by taking a one-hour class on “underwriting the self-employed borrower”. We are talking about the IRS and the Tax Code here. Consider something as (almost) universally understood as the ability to add back depreciation to a borrower’s income. Seems simple enough, until you realize that there are myriads of places that depreciation can be found on a personal income tax return alone (Schedule A, Form 2106, Schedule C-part 2, Schedule C- part 3, Schedule E-page 1, Schedule E- page 2, and Schedule F…) You get the picture. The difference between a real deal and a satisfied customer and no deal and an unhappy non-customer might just rest upon your loan officer’s familiarity with some fairly abstruse income tax forms.
None of us can wish-away the profound changes that are impacting our livelihoods every day. We can choose to be proactive in how we answer them. You’re still interested in real estate, which means that you are probably having to rethink everything you used to know. It may be time to rethink the level of financial sophistication you expect from your lender relationships.
The opinions expressed in this article are entirely my own and not necessarily shared by Guild Mortgage Company.
Chris Butaud, CPA Masters, Taxation Loan Officer NMLS 13157 Guild Mortgage P#206-686-2999