How a Loan Underwriter Interprets Different Situations

How An Underwriter Interprets Different Situations

An underwriter (UW) is paid to be negative and they would rather turn down a
couple of good loans than approve one loan that could be chronically late or lead to a foreclosure. That seems a rather harsh statement, but the consequences of chronic lates or a foreclosure are more costly than you can imagine. Also, if it is found that the loan was done out of fraud at any time down the road, the mortgage lender must buy the loan back. This gets extremely expensive, and has often forced companies out of business quickly.

WHY AN UNDERWRITER HAS TO THINK THIS WAY.
There is a very common misconception about foreclosures which I think was probably fostered by all those old Mighty Mouse cartoons. You know the ones - Mighty Mouse trying to save Pauline Pureheart and her Daddy's farm from Oil Can Harry's evil clutches. In the cartoon O.C. Harry contrives to get the farm by making sure Pauline Pureheart's Dad can't make the house payments. In the present day that scenario couldn't be farther from the truth!

It IS true that Pauline's Dad would lose the farm if he didn't make the payments, but the Mortgage company does not get the home, nor do they want it! They only get temporary custody of it and then have the bonus of having to prove they did their best to protect the borrower's interests and tried diligently to sell the house for full market value (no brother-in-law sales allowed).

Once the foreclosure sale is complete, and if the ex-property owner gets an appraisal that shows the house sold for less than FULL MARKET VALUE, the mortgage company has to return the difference between the sales price and market value. This means the mortgage company usually has a lengthy and costly hold time.

If the mortgage company makes any mistakes in dotting a single i or crossing a single T the whole foreclosure can be overturned and the property and all monies must be returned to the borrower.

Once the house is sold, the mortgage company can only keep enough money to cover the back payments, interest, and collection costs. ANY PROFIT GOES TO THE EX-PROPERTY OWNER. This means there is no profit incentive to cause a mortgage company to want to foreclose… so they hate foreclosures!!!

An even bigger problem than foreclosures are late payments.

An UW looks more carefully at the potential for late pays because there are so many more people making late payments than allowing their properties to be foreclosed. And since there is no sale of the property with a late payment, there is no chance to recapture their costs. Yes, you do pay a late fee, but since the mortgage company pays a third party servicing company to collect these late payments, there is a net loss.

One of the more important jobs of a Mortgage Processor is to prove to the UW that you not only have the ability to pay, but also the WILLINGNESS to re-pay the loan. That is why there is so much more to processing a loan than just gathering data, and why it is tough to have too much data about you, but easy to have too little.

The loan officer needs to know ALL the mitigating circumstances behind - the late payments, job changes, low cash reserves, erroneous credit, etc. etc. so that we know best how to present this information to the UW so they are allowed to approve your loan.

Once an Underwriter is convinced you are worthy and WANTS to approve your loan, they will begin to look for compensating factors to substantiate their decision. In other words if you are weak in one area the UW will look for you to be strong in other related areas.

Here is a list of some of the bigger, more common weaknesses and the compensating factors normally used to overcome them.

BIG INCREASE IN HOUSING EXPENSE - especially if your payments will be near doubling:

OFFSETTING FACTORS ARE CREDIT & RESERVES.
“Payment Shock” accounts for over 50% of all late payments in the early years. To show you can manage your new payments without a problem, the UW will look for a larger than normal savings account and look at your credit payment history very closely.

Living with family to save money promotes an even greater payment shock since you will usually be coming from $0 rent. If this is the case, you will need even larger reserves than if you had stayed in your rental abode. If you are paying "Mom" to live there, make sure you have proof of consistent rental payments in the form of cancelled checks, money orders, etc. DON'T PAY UTILITIES OR GROCERIES AS YOUR SHARE OF THE RENT!

MORE THAN 2 ADDRESSES IN THE LAST 2 YEARS:

OFFSETTING FACTORS ARE JOB HISTORY, CREDIT & RESERVES.
Stability is one of the more important aspects of a loan approval. The UW will look to see that your job/income history is stable, and that the moves did not damage your credit or savings patterns. If you have moved more often than every 6 months, you will probably need to write an explanation of the positive attributes of the moves to be able to get the best loans.

MORE THAN 2 JOBS IN THE LAST 2 YEARS:

OFFSETTING FACTORS ARE CREDIT & RESERVES.
Stability is one of the more important aspects of a loan approval. The UW has to ask him/herself, "Will you quit your job tomorrow?", and if you do, "Will you be able to make your house payment?"

The UW would like for you to have been on your new job for at least 6 months, and be out of any probationary period. If your new job is in the same field, or you are in a profession that it is "normal" to have frequent job changes, it may only impact you to the degree that you have to write a letter explaining the circumstances. Hopefully, the moves were for positive attributes such as increased salary, promotion, or promotion potential.

PAY STUB RED FLAGS: the UW will be looking for unusual incomes/deductions, such as Credit Union deductions, Overtime income, Bonus income. Many times the UW will require a letter from your company, on company letterhead, spelling out all deductions if they are not self evident.

BONUS/OVERTIME: The UW is looking for the consistent portion of your income stream that will be available to pay the consistent house payment. Overtime and Bonuses will have to be proven to be consistent before they can be counted. Ideally your employer will guarantee its continuance and a specific minimum amount. The best OT & Bonus income is derived weekly or monthly, and therefore available every month to pay the house payment. An average of the Bonus/OT income can usually be counted.

RENTAL INCOME: The UW knows there are costs inherent in owning a rental property. For this reason you cannot count 100% of the rental income - only 75%. Alternatively, you can furnish a 2 years history of income and outgo as well as tax returns and they will count whichever figure is higher. Trust me, 75% is best!

SELF EMPLOYED?

CREDIT, RESERVES, & INCREASE IN SHELTER EXPENSE ARE OF PARAMOUNT IMPORTANCE.
Since the UW knows you wouldn't lie to Uncle Sam, they will use your Income Tax figures to prove your income. They usually use line 31 of the tax return (adjusted gross income). They can add any one time costs or "paperwork" deductions like depreciation back into this income figure to "Gross Up" your income.

CREDIT ISSUES:

OFFSETTING FACTORS ARE: WHEN DID IT HAPPEN? WAS IT OUTSIDE YOUR CONTROL? IS IT LIKELY TO HAPPEN AGAIN?
This looks directly at your WILLINGNESS to pay your debs. You will need to furnish a good explanation for each and every incident.

The UW will try to determine from your past history what the chances are that you will pay the new house payment on time. They will not only look at your history, but also look at what type of debt had the problems. Medical lates/collections due to insurance problems have the least amount of impact. A 30 day late last month is worse than a 90 day late 3 years ago. Mortgage/rental lates are the worse. Balances on charge offs or collections run a close second to Mortgage lates. BUT, DUE TO HOW CREDIT SCORES ARE CALCULATED, DO NOT RUN PAY ANY OF THEM OFF WITHOUT FIRST TALKING TO US. Paying it off allows the creditor to report it again as if it just happened which can significantly LOWER your credit scores. Yes, I know this just sounds WRONG, but that's how it is.

Still, some loan types require all balances to be cleared if you want the lowest down payment & lowest interest rate loan. The necessity to pay off balances is dependent upon the mortgage loan type you are trying to secure, the type of loan charged off & whether the unpaid balance is over/under $500. So you will need to determine what type of loan you will be getting before you know how to handle these debts.

Don't just arbitrarily pay off outstanding balances, you may be doing the wrong thing for all the right reasons.

LOW LIQUID RESERVES:

OFFSETTING FACTORS: GREAT CREDIT & MINIMAL INCREASE IN SHELTER EXPENSE. Typically UWs will want you to have at least 2 months payments in reserves. Since your shelter expense is usually increasing, if you don't have this much money in reserve, you will have to find another way to prove to the UW that you can handle the increased payment. They want you to prove you have the capacity to handle the move plus the costs to maintain the property and money for emergencies.

NO CHECKING ACCOUNT:

OFFSETTING FACTORS: NONE.
Usually, no checking account means NO LOAN! Why? Because they have found that historically people without checking accounts do not pay their bills in as timely a manner as those with checking accounts. It seems that it must be just too much trouble for people to get a money order or cashiers check in a timely manner. Remember that late payments are a real thorn in the side of the UWs.

THERE IS ALSO ANOTHER PROBLEM: Without a checking account there is no way to verify where your funds are coming from. There is no way to know if it actually is your money, a loan, a gift, drug money, etc. This means they have no way to determine whether you actually have the ability to manage your money well enough to make the house payments. Keep in mind that late pays are a much bigger and more costly issue than foreclosures.

A new checking account generally needs to have been opened at least 6 months. Transferring from one account to open another account is not a problem because funds can be tracked. FHA is the only loan type that currently allows you to get a loan without a checking account.

GIFTS:

OFFSETTING FACTORS: CREDIT & ADDRESS, JOB & INCOME STABILITY, IS IT A SPECIAL OCCASION GIFT vs. A NEED.
If you must have a gift, the UW will automatically presume you probably don't have the capacity to make the new payment, so underwriting is begun with 2 strikes against you. This means everything else in your file better be perfect! The person giving the gift needs to be a close family member. On the other hand, gifts for a special occasion such as getting married have little or no negative impact.

Each loan type has limits on how large a gift you can receive. For instance, on a 95% loan, the 5% down payment must come from your own funds, however, you can get a gift for all your closing costs and prepaids (insurances etc.) On an 80% loan, you can get all 20% as a gift with little impact upon your approvability. But before you receive the gift, check to see what your particular loan type limitations might be.

Ideally a gift should be given prior to loan application and definitely before closing. If someone wants to give you more money than is allowable, the balance must come after closing or you will not get your loan.

FYI: In many cases, the UWs are more concerned about you receiving too much money, too late in the process, more so than not having enough money, because they are worried this last minute money could be a gift or a loan. It is easier to track and source your funds when you are slowly saving money than it is to source a sudden lump sum that mysteriously appears one day. The UW is paid to be negative, and will presume funds delivered late in the process to be a gift/loan. Why does that matter? They have found that unless you have a certain percentage of your own funds into the loan the risk of foreclosure skyrockets! They also want to know that you haven’t procured a new loan that would increase your monthly debt obligation yet again.

What is “Automated Underwriting”?
Many mortgage lenders today use specialized computer programs from Fannie Mae and Freddie Mac known as Automated Underwriting programs. These programs use the information provided in your mortgage application to very quickly come up with a pre-approval decision on you. The loan officer uploads the information given him/her by the applicant into the system. Typically within less than a minute, the system delivers to the loan officer and underwriter a decision, and tells them whether or not the underwriter should look favorably on the mortgage application, also known as a “positive finding”.

A positive AU finding, however, is only a recommendation that IF everything checks out EXACTLY as the application states, and if nothing such as income or loan balances has changed in status, then the computer recommends the underwriter look on the applicant favorably. A human underwriter still has to look at your documentation and be sure everything matches and there are no additional questions raised by the documentation - such as that Credit Union deduction on your pay stub. Is it a savings deposit, or is it a payment on an undisclosed debt? In other words, a human has the last word, so proper presentation of your finished file by the mortgage company is critical. Furthermore, for these reasons, it is absolutely possible to receive a “pre-approval” on a mortgage applicant (based on the AU findings), and then later for the loan to actually “fall through”. The safest thought is this… NOTHING is absolute and guaranteed on a mortgage loan until the LOAN CLOSES.