I talk to a lot of loan originators who, it turns out, have never actually read all the fine print on a 1003. In particular I get questions about Section VI where it talks about “Pledged Assets.”
What is a pledged asset? In essence it’s an item that has a lien on it. The borrower “owns” it and it has value but they are still paying for the item.
A classic example is a car. If the current value of the car is $10,000. but they owe $4,000 and are making monthly payments on that loan, then the car is a pledged asset. The car is actually collateral pledged against the title loan for the car.
The car is an asset, and therefore counts in the asset column on the 1003, but it is also a liability and counts in the liability column as well. The net result in this case is $6,000 in positive net worth to the borrower.
A mortgage is also a pledged asset, but Real Estate Owned goes in it’s own subsection (pg. 3 in Section VI of the 1003).
Revolving credit cards, student loans and many installment loans are not pledged assets because there is no collateral to secure these loans. They are straight liabilities.
Insurance policies and retirement and investment accounts are not usually pledged assets either because most (if any) loans against them are installment contracts that ‘pay back’ an accumulated balance. Notice that they also have their own places in Section VI of the 1003. In addition, some of these types of assets will often have their values grossed down in underwriting to account for early withdrawal penalties.
401k loans are payroll loans and are liabilities. These loans are almost never shown on a credit report, but are shown on the applicant’s pay stubs. The employer has loaned out money from the employee’s retirement fund and is taking it back in installments deducted from the employee’s paycheck. Watch out for these when calculating debt-to-income ratios! You’ll need to know how much money the borrower owes, and how long the debt will exist. Realize that this amount is subtracted from the borrower’s gross monthly income until the debt is paid, therefore his DTI suffers. Sometimes a letter of explanation to the underwriter may help get the home loan approved, depending on the balance owed on the payroll loan.
Alimony, child or dependent support and separate maintenance payments will be either an asset or liability depending on whether the payments are received or owed. These are not pledged assets. When these payments are being received, it is allowable to gross the amount up by 25% since they are non-taxable income. Also, when this type of income is being received, ECOA protects the applicant against potential discrimination and the originator must first tell the applicant they may choose not to show this income on the 1003. If not, the originator should then calculate whether the income is needed to qualify for the loan and advise the applicant accordingly.