Why Haven’t Loan Officers Been Told These Facts?
Dependent Status for BAH
Across the board, the number one underwriting exception category is effective/stable monthly gross income. In particular, stakeholders often struggle to comprehend regulation-driven policies such as those under the VA, FHA, and USDA single-family programs. Along the lines of regulation-driven policy, yet another dimension of complexity is determining the income stability of federal employees.
The Department of Defence (DoD) is no slouch when it comes to writing regulations, and the DoD “FINANCIAL MANAGEMENT REGULATION” is not exactly light reading. Some of the more byzantine regulations define various allowances for U.S. Government employees, such as service members.
When calculating income, the MLO’s role differs from that of the underwriters. The underwriter’s focus is quality control. Compliance with the investor or guarantor requirements and a reasonable ability-to-repay determination are first in order.
The MLO has the unenviable task of forecasting the underwriter’s determinations, including complex income analysis. Some MLO’s are pretty good at making these forecasts. However, underwriters err on the side of caution. If the underwriter can’t (or won’t) correctly determine the income, the worst outcome (at least from the MLO and applicant perspective) is an inappropriate adverse action.
When the qualifying numbers are close, small mistakes can have dire impacts. Sometimes, the numbers are what they are and can’t be improved. However, a well-trained underwriter not only guards against overstated income but also correctly calculates the income, given the best information available. When a lender gets it wrong, policy exceptions derived from mistaken interpretations of credit policies may lead to indemnifications, penalties, and unnecessary adverse action.
For example, AvIP is tricky. Generally, in the past, aviation incentive pay (a.k.a. “flight pay”) was a given for pilots. However, the awarding of Aviation Career Incentive Pay as an entitlement pay was discontinued on 1 Oct 2017. Since then, the military has substituted the retention allowance for aviators known as Aviation Incentive Pay (AvIP). AvIP may have other monikers as well. The DoD changes nomenclature like wet socks. AvIP is not a given. Generally, aviators must fly for an established minimum of hours to maintain eligibility for AvIP. Pilots are often assigned non-flying jobs during their military career. When that happens, absent “Duty Involving Flying” (DIFOPS), you lose your AvIP during non-flying periods. The more senior in rank, the more likely the applicant’s duty may include non-flying activities.
Generally, aviators receive AvIP as long as their duty includes at least 4 hours of monthly flight time (in the air). However, without a DIFOPS billet, e.g., 2102 or 2302 (Navy), 75XX or 8042 (Marines), no automatic AvIP. But, “If a Service member does not fly 4 hours in any month, any hours flown during the last 5 preceding months (which have not already been used to qualify for flight pay) may be applied to meet this 4-hour requirement. DoD 7000.14-R 2.4.1. Servicemembers serve at the convenience of the government. Some assignments might start as a job with ample flying time but can morph into a job with little or none.
Additionally, many other military allowances, such as Hostile Fire or Imminent Danger, are temporary and may be unsuitable for stable monthly gross income.
Lenders must understand these fine points. Obviously, if the applicant qualifies apart from any questionable allowances, getting a nosebleed from shoehorning income is unnecessary. On the other hand, if the allowance is necessary to meet the financing objectives, carry on :).
Basic Allowance For Housing
When assigned permanent continental US duty, service members generally receive a Basic Allowance for Housing (BAH) and a Basic Allowance for Subsistence (BAS). Generally, BAH and BAS are the only guaranteed military allowances for servicemembers living off base. This article examines the challenges attendant with the mother of all federal allowances, the Basic Allowance for Housing (BAH). Generally, lenders do not have to parse regulations to determine this allowance. Generally.
When calculating BAH, the first order may be the with or without dependent determination. What is a dependent? What about joint custody? If both applicants shall receive BAH and share children, do both applicants get the allowance with dependents?
DoD 7000.14-R, Volume 7A, Chapter 26
3.0 DETERMINING DEPENDENCY (2603)
3.1 Dependent (260301)
3.1.1. Eligibility
3.1.1.1. A Service member’s lawful spouse and legitimate, unmarried, minor children are always dependents for housing allowance purposes, except as specified in this section;
3.1.1.2. An unmarried minor child of an invalid marriage, or a marriage annulled as void or voidable, is a dependent for housing allowance purposes; or
3.1.1.3. An incapacitated child over age 21, a ward of the court, or an unmarried child over age 21 and under age 23 who is attending college full time requires an “in-fact dependency,” as specified in Service regulations. The child is a secondary dependent and must be dependent upon the Service member for over one-half of the child’s support. The child’s income, not counting the Service member’s contributions, must be less than one-half of the child’s living expenses, and the Service member’s contribution must be more than one-half of the child’s monthly living expenses.
Easier to Digest Version 🙂
Essentially, a dependent is a person who relies upon a servicemember for financial support. Eligible dependents may include spouse, parent(s), parent(s)-in-law, step-parent(s), adoptive parent(s), in loco parentis, legitimate child(ren), stepchild(ren), incapacitated child(ren), adopted child(ren), pre-adopted child(ren), child(ren) from the age of 21 to the date of their 23rd birthday who are enrolled in a full-time course of study in an institution of higher education, dependent child(ren), and court-appointed wards. In loco parentis, as the term relates to BAH, means acting as a guardian without the formality of legal proceedings.
Just because a person is an “eligible dependent” does not automatically indicate the servicemember will receive the BAH with dependent allowance. The regulation states that certain dependency determinations are subject to reviews and recertifications. Different types of dependents merit different determination protocols. For the most part, each service will make its own dependent determinations.
Below are two questions the DoD frequently answers regarding BAH and dependents.
FAQ 1: If a service member is divorced from another servicemember and shares legal custody of the child/children with the former spouse, may both members receive BAH with dependents?
Answer: No, both members may not receive a housing allowance based on the same dependent. When the former spouses share legal and physical custody of the child, each parent is authorized BAH at the with-dependent rate during the period the child is actually in the parent’s physical custody. Both parents may not receive a housing allowance for the child during the same period.
FAQ 2: If two BAH-eligible Service members are married with children, will each member receive the BAH with or without a dependent rate?
Answer: One member in the marriage will receive the ‘with dependent’ rate and the other will receive the ‘without dependent’ rate. The rules governing the allocation of dependents for BAH are specified in the DoDFMR, Volume 7A, par. 2604 [PDF, defense.gov]. The rules reflect the law and the policy of the Services.
Do you have a great value proposition you’d like to get in front of thousands of loan officers? Are you looking for talent?
BEHIND THE SCENES – FHA Appraisal Review and Reconsideration of Value Updates
Lenders may immediately implement the provisions of Mortgagee Letter 2024-07. Lenders must implement the requirements for FHA case numbers assigned on or after September 2, 2024.
Changes apply to FHA Single Family Title II forward and Home Equity Conversion Mortgage (HECM) programs.
Among other changes, the ML announces a substantive implementation of the Action Plan to Advance Property Appraisal and Valuation Equity (PAVE), which identifies discrete actions the federal government can take to root out racial, ethnic, or national origin bias in residential property valuations.
Excerpted from Mortgagee Letter 2024-07
FHA is now enhancing its current policy with these additional and clarified standards for appraisal reviews, including the second appraisal and reconsideration of value (ROV) processes. This includes revising material deficiencies and clarifying when an underwriter may proceed directly to a second appraisal after identifying a material deficiency in an appraisal. Also, this includes a requirement for Mortgagees to establish and disclose their process for reviewing and responding to borrower-initiated ROV requests.
From the Amended 4000.1 Property Acceptability Criteria (II.A.3.a)
(1) Borrower-Initiated ROV
The Mortgagee must establish an appeal process that includes steps for the Borrower to receive a copy of the appraisal report and request an ROV when the Borrower believes the appraisal report is inaccurate or deficient. The underwriter must thoroughly assess all borrower-initiated ROV requests to determine the applicability of an ROV and the relevance and appropriateness of information before communicating with the Appraiser. The Mortgagee is responsible for confirming the borrower-initiated ROV complies with all general ROV requirements before submission to the Appraiser.
At a minimum, the Mortgagee’s borrower-initiated ROV process must:
Provide an easy-to-understand disclosure at mortgage loan application and upon delivery of the appraisal report to the Borrower with instructions that explain the borrower-initiated ROV process,
the expected ROV processing times, and the process for requesting clarifications or corrections unrelated to the value conclusion.
Specify in the disclosure the process for submitting the ROV request, what information will be required from a borrower, and any limitations on the information allowed, including:
- Up to five alternative comparable sales for consideration
- Only one borrower-initiated ROV request is permitted per appraisal
- Establish protocols for communication with the Borrower, including the following communications, which must be in writing:
- Acknowledging receipt of the ROV request
- How to correct an incomplete ROV request
- Updates on the status of the ROV request
- The results of the ROV request
If the borrower-initiated ROV request is unclear, deficient, or requires additional information, the Mortgagee must remediate with the Borrower, as applicable.
Summary ML Changes:
- Revises appraisal material deficiencies to include potential violations of fair housing laws and professional standards related to nondiscrimination in Ordering a Second Appraisal (II.A.1.a.iii(B)(9))
- Adds language about forgoing communication with an Appraiser about a material deficiency and reporting an appraisal replaced due to a material deficiency in Ordering a Second Appraisal (II.A.1.a.iii(B)(9))
- Adds specific expectations regarding the underwriter’s training and identification of deficiencies in Appraisal Review (II.A.3.a.vi)
- Moves ROV content from II.A.3.a.viii to its own section renamed General Reconsideration of Value Requirements (II.A.3.a.ix) and renumbers subsequent sections
- Adds Borrower-Initiated ROV processing requirements in Reconsideration of Value (II.A.3.a.ix(A))
- Adds Quality Control standards (II.A.3.a.x) for the Appraisal Review and the Reconsideration of Value
- Revises appraisal material deficiencies to include potential violations of fair housing laws and professional standards related to nondiscrimination in HECM Ordering a Second Appraisal (II.B.2.a.iii(B)(10)(b))
- Adds language about forgoing communication with an Appraiser about a material deficiency and reporting an appraisal replaced due to a material deficiency in HECM Ordering a Second Appraisal (II.B.2.a.iii(B)(10)(b))
- Adds specific expectations regarding the underwriter’s training and identification of deficiencies in HECM Appraisal Review (II.B.4.a.ii(E))
- Revises HECM General Reconsideration of Value Requirements (II.B.4.a.ii(H)) and adds Borrower-Initiated ROV processing requirements (II.B.4.a.ii(H)(1)
- Adds HECM Quality Control standards (II.B.4.a.ii(I)) for the Appraisal Review and the Reconsideration of Value
- Adds Appraiser standards for responding to the DE underwriter requests (II.D.2.e).
Tip of the Week – Discover What You Need To Build Trust with Others
Learning interpersonal skills is challenging. On your best days, you may feel you do alright with others. However, the other 75% of the time (or 95% of the time), relationships are demanding and tax our abilities. Recently, I had an opportunity to coach a team member on building credibility and confidence with others. Something everyone can improve on.
He felt that important stakeholders lacked confidence in him. He was frustrated and a little angry on the surface, but underneath, he was wounded that his best was not being recognized or well-received. His feelings were completely understandable. But was the central question his perception of others or how others perceived him? In short, yes.
He had a meeting scheduled with one of these hard-to-please stakeholders and was dreading the feedback or comments they might make about the work in progress. I asked what type of person this individual is: direct, amiable, or how would you characterize their personality type? After a moment, he said he wasn’t sure, but she was very kind, smiled a lot, and had many family pictures in her office. I asked what kind of specific feedback about his work had she given in the past? He said, “She has never offered any feedback or coaching about me, just the work in general.” I asked, “Why don’t you ask her for feedback? What questions can you ask her that might provide what you think you need to know?” He said, “How do you do that?”
I suggested he approach her in sincerity and with humility. “Start by speaking with her in her native language.” I wasn’t suggesting he speak a particular dialect or tongue. Instead, he had to communicate his concerns effectively so she understood his message. I said she sounded very amiable. Why not ask for her help? If that does not work, try another approach. Be specific. Communication can involve trial and error and iterations of the same message.
I asked, “When you meet with her, what might you say to acknowledge her interest in you as a person? What might you say to let her know you value her not just as a team member but as a mentor, too? Do you think you might share with her that you feel the team lacks confidence in you? Specifically, might you ask her, are there two or three things you can do differently that might build people’s trust in you?”
An amiable person wants and even needs to know that their relationships are in good standing. You must show an interest in them as a person before they can hear what you want to say. Almost always, a person will be favorably inclined towards those who demonstrate respect for them. That works with most personality types – respect.
Teachability or humility is a huge plus in how others see us. Obstinate, prideful folks do not curry positive feelings in others.