By Dave Hershman, Senior Vice President, Sales of Weichert Financial
Question: I have an underwriter asking for an audited P&L on an FHA self-employment file and it will cost my client $600. Why would they need this on an FHA loan? This does not make any sense to me and I don’t want to upset my customer. It is not a big loan and the cost is significant to my client. –Daryl from California
Answer: The subject of self-employment is one of the most complex that we encounter within the industry. This is the reason why “no-income” loans were so popular in the previous sub-prime error and “bank statement” loans have had a comeback in today’s non-QM world.
There is so much misunderstanding surrounding the issue. And just because an underwriter understands self-employment guidelines, it does not mean that they are an expert in self-employment in general.
FHA is actually not different than the rest of the industry with regards to self-employment documentation, at least to my knowledge. The problem is misuse of the word “audit” in guidelines and underwriters not understanding what an audit is. I am not trying to be an accountant here, but generally, there are three levels of audit:
- Compilation: They compiled the numbers but there are no assurances behind those numbers.
- Review: They reviewed the numbers and the situation, and they make sense. Here there are limited assurances.
- Full Audit: They actually audited all numbers and situation. A full audit could cost tens of thousands of dollars, depending upon the size of the company. Have you ever worked for a bank when it was audited?
What the underwriting guidelines or underwriter means by using the word ‘audit’ is that the P&L is completed by an accountant. In reality, they will receive a compilation. Yes, a compilation is a form or audit, but the lowest form.
Don’t think the accountant needs to prepare even a compilation? You can make that argument as well. Perhaps the information in the P&L can be verified independently. For example, a real estate agent can get their income numbers from their company.
And perhaps the expense information is consistent with the prior years on the returns. If there is no variation, there is less of a need for verification of the numbers.
Dave Hershman is Senior VP of Sales of Weichert Financial and the top author in the mortgage industry. Dave has published seven books, as well as hundreds of articles and is the founder of the OriginationPro Marketing System and Mortgage School–the online choice for expert mortgage learning and marketing content. His site is www.OriginationPro.com and he can be reached at firstname.lastname@example.org.