Key facts
- Loan officers should ask five questions to improve complex income preapprovals.
- A preapproval should clearly state its load-bearing assumptions in one sentence.
- Loan officers should rank income sources as required, helpful, or unnecessary.
- Uncertainties should be written as testable statements, such as 'This approval assumes the compensation has the required history and remains likely to continue.'
- A memo should list sources, amounts, reviewed documents, assumed programs, and unresolved conditions for complex preapprovals.
Loan officers can enhance the reliability of complex income preapprovals by adopting a disciplined approach to identifying and verifying income sources, according to Case Laviolette, owner and mortgage loan originator at Kellibrooke Mortgage Partners, LLC. Instead of treating assumptions as settled facts, loan officers should clarify what supports a preapproval number and what remains unresolved.
Laviolette suggests that before issuing a preapproval, loan officers should define the number's underlying assumptions, specifying whether it relies solely on verified base pay or includes variable compensation, business income, restricted stock, or rental income. A clear, one-sentence explanation of these assumptions can make a preapproval more robust.
Identifying the primary income source that is crucial for the approval is key, especially in complex files with multiple legitimate sources. If the file can proceed without an unverified source, that should be noted. Otherwise, the unresolved source requires attention before the borrower proceeds based on the preliminary figure. Ranking income sources as required, helpful, or unnecessary helps prioritize efforts.
Loan officers should also consider what conditions could invalidate a chosen income source, examining factors like history, trend, payment form, ownership, continuance, and access. Uncertainties should be articulated as testable statements, such as confirming an assumption that compensation has the required history and is likely to continue. For instance, if restricted stock is a key income component, the loan officer must confirm the award type, vesting record, distribution method, and program-specific calculations, rather than relying on an unsupported estimate.
Preventing the double-counting of income is another critical step. Loan officers must be able to trace each included amount to a single source and role in the approval. For example, a borrower with W-2 wages and K-1 income from the same S corporation requires an assessment of the relationship between wages, ownership, and business cash flow, rather than simply adding the figures from tax forms.
Finally, for complex preapprovals, loan officers should create a concise assumption memo. This memo should detail the sources used, the monthly amount attributed to each, the documents reviewed, the assumed program or lender path, and any unresolved conditions that could alter the outcome. It should clearly label what is verified, provisional, and excluded, enabling efficient review by processors, underwriters, or subsequent loan officers.