December 11, 2007

Your question:

Do I have to ask about and get documentation for cashflow that I do not need to qualify my borrower?

Linda says:

Another way to ask this question is "When is enough, enough?"

When you have enough to qualify with wages, business income and the usual sources do you have to get info on alimony, capital gains, notes receivable and the like?

It depends. (Don’t you just hate that answer????)

Consumer and Mortgage loans

If you can make it to a confident ‘yes’ without using all their income sources, I am inclined to say NO.

  • There is no downside to these since they are income only, not possible losses.
  • To use them you would need to ask the borrower for additional information to determine that they will continue long enough.
  • You are unlikely to make another significant consumer or mortgage loan to the same borrower within the year in which you might need that skipped source of cashflow to qualify.

Caution if they have income/losses from:

  • A corporation they control. The company may be in trouble.
  • Rentals. Losses are limited by statute and may be much worse than they appear.
  • Capital gains/losses: Losses may also be limited.
  • Partnership or LLC losses: Losses can also be limited by passive loss rules

Commercial loans

You might choose to apply the same concepts. The significant difference for some commercial lenders is the ongoing nature of the relationship. Sure, you may not need that income source for the specific loan you are considering, but if you are doing this right, you’ll be making another loan to this company soon, maybe this year.

You might find your borrower would rather get you more complete information every year than have to backtrack next time to get you the information you need.

Don’t shoot your borrower in the foot when you skip unneeded info!

Even if you do not need the alimony, contract receivable, capital gains or other income source this time, make note of it when skipped or you will make a lot more work for yourself (or the next lender serving this borrower) later.

I recommend that if you skip a significant cashflow source, you add to your comments:

IF MORE QUALIFYING INCOME IS NEEDED, CONSIDER $12,000 alimony received (or whatever you have just skipped). You might also mention to your borrower that since you do not need it to qualify, you won’t be asking for the divorce decree this time. This let’s the borrower know that when the income is needed, more documentation will be needed. Believe me; the next lender does not want to hear: "Gee, Susan did not ask me for all this stuff with the last loan!"

Check your guidelines

As always, be sure you understand the guidelines at your financial institution before you apply any ideas you get from me. There are so many ways things are done. I’ll just keep giving you food for thought.

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Linda Keith, CPA

Linda Keith CPA is an expert in credit risk readiness and credit analysis. She trains banks and credit unions throughout the United States, both in-house and in open-enrollment sessions, on Tax Return and Financial Statement Analysis.
She is in the trenches with lenders, analysts and underwriters helping them say "yes" to good loans.
Creator of the Tax Return Analysis Virtual Classroom at, she speaks at banking associations on risk management, lending and director finance topics.