As a consumer, youâ€™re used to being the one with the
power to judge the products and services you purchase and the companies that
offer them. But when it comes to financing your new home orÂ refinancingÂ the
one you already own, you hand that power over to theÂ mortgage
lendersÂ and, more specifically,Â the underwriting department. One of the most frustrating times
for everyone involved in a real estate transaction is the time it takes
mortgage underwriting to render a decision on a loan. Rather than make excuses
for underwriters, I would like to help educate buyers, sellers, and anyone else
involved in the real estate transaction as to why sometime patience and
understanding is necessary.
What Is UnderwritingÂ â€“ Mortgage
underwriting combines quality control and approval into one person. The lender
pays the underwriter to make good loans and to prevent making bad loans. An underwriter must carefully
analyze every bit of information the loan officer asks you to provide as part
of the loan application process as well as the collection of â€œtrailing
documentsâ€ that you send in later to substantiate the information youâ€™ve already
provided. In general, the underwriter will attempt to verify two primary things
in order to meet the bankâ€™s criteria for offering you a loan: general
creditworthiness and debt-to-income ratio.
Additionally, one of the underwriterâ€™s jobs
is to review the appraisal of the home you wish to buy to make sure its value
matches the size of the loan you are requesting. A good
underwriter will take into consideration the location of the home and how it
might be affected by natural disasters, such as floods.
First, your general creditworthiness gives the lender an idea of
your general willingness to repay your debts.Â
There are many ways to determine this, but the most common way is to use
a mortgage credit score. This score is based on an analysis of your various
credit files such as the FICO score offered by Fair Isaac
Corporation. The mortgage credit score
uses consumer data stored by the three major credit repositories, Experian,
TransUnion, and Equifax.Â If an
underwriter spots red flags in your credit report, such as bankruptcies and
collections, the underwriting team wonâ€™t automatically disqualify you for the
loan. Loan applicants often have valid reasons for such issues, so you may be
asked to provide a letter of explanation. The best thing you can do to improve
the chances of approval is to respond with prompt and complete
information.Â Also, you may be able to
overcome past credit problems if you have a solid employment history or agree
to make a large down payment.
Secondly, your income and the amount
of money you owe will be factored in when your application is underwritten
(known as your debt-to-income ratio). The depth of the underwritersâ€™
investigation will depend on how great a risk you are thought to be. They
almost certainly will contact your employer to make sure you actually have the
job and the salary that you listed on your loan application. If aspects of your
job history, credit report, or personal finances are questionable or unclear,
the underwriter will ask for additional information. Again, the best thing you
can do to improve the chances of approval is to respond with prompt and
Why The ScrutinyÂ â€“ Most lenders sell government-backed mortgages to larger
banks or government sponsored enterprise (Fannie Mae or Freddie Mac). The
resale of mortgages allows local lenders to reinvest more of their assets in
more mortgages. Problems arose a few years ago as a result of well-intentioned
politicians getting involved in real estate.
History LessonÂ â€“ About 10 years ago housing prices rose too rapidly. The
reason was the result of the federal government relaxing lending rules with
respect to credit scores. It was at this time that lenders began making a very
legal type of mortgage â€“ adjustable rate mortgage. The combination resulted in
lenders writing mortgages for borrowers who could not afford them over the long
run. That so-called bubble burst in 2007. Then Congress passed the Dodd-Frank
Bill passed in 2010 to correct lending practices. The language gave Fannie and
Freddie an opportunity to seek financial compensation from lenders that sold
mortgages which eventually went into foreclosure. Dodd-Frank is not perfect
legislation, but it did accomplish much to stop the practice of making bad
mortgages eventually sold to Fannie and Freddie. To prove that the lender
accomplished their diligence prior to making the mortgage, lenders authorized
their underwriters to swing the approval pendulum to the other side. To the
casual observer, it seems that underwriting does not want to make loans.
Underwritingâ€™s ObjectiveÂ â€“ The main objective of underwriting remains making good
loans. If a borrower measures up the affordability standards, expect mortgage
approval. Because a lender wants to lend money that they try to find a way to
make a mortgage salable in the secondary market. Sometimes that means asking a
borrower for additional documentation. It could mean asking the borrower to
make a higher down payment thus lowering the loan amount. The greater the
financial stake (equity) the borrower has in the property, the lower the risk
for the lender.
The ResultsÂ â€“ The pangs of mortgage approval have positive results.
Nationally mortgages appear on the decline. Both lenders and legislators
realize that past mistakes caused problems. Even with the fixes, problems still
occurred. No system is perfect for every transaction. That is because every
transaction is unique.
the underwriter has an important and thankless job. That job includes making
loans, which creates profit for the lender. At the same time, the underwriter
must minimize making bad loans, which prevents losses for the lender.
Although the financial markets have tightened lending guidelines and
financing requirements over the last few years, the right advice when applying
for your loan can make a big difference. Not all loans are approved. And even
when they arenâ€™t approved immediately, it doesnâ€™t have to be the end of your
real estate dreams. There are many reasons why a mortgage loan for the purchase
of your real estate could be declined.
a few things to understand and prepare for when applying for a mortgage:
loan-to-value ratio (LTV) is the percentage of the appraised value of the real
estate that you are trying to finance. For example, if you are trying to
finance a home that costs $100,000, and want to borrow $75,000, your LTV is
75%. Lenders generally donâ€™t like a high LTV ratio. The higher the ratio, the
harder it normally is to qualify for a mortgage. You can positively affect the
LTV by saving for a larger down payment.
credit score can be affected negatively, which in turn affects your mortgage
loan if you have a high credit-to-debt ratio. The ratio is figured by dividing
the amount of credit available to you on a credit card or auto loan, and
dividing it by how much you are currently owe. High debt loads make a borrower
less attractive to many lenders. Try to keep your debt to under 50% of what is
available to you. Lenders will appreciate it, and you will be more likely to
get approved for a mortgage.
or Bad Credit
things can derail your mortgage loan approval like negative credit issues. Â Yet, the fact of having no credit record can
sometimes present as much difficulty with your loan approval as having negative
credit.Â With no record of timely loan
payments in your credit history, a lender is unable to determine your
likelihood to repay the new mortgage. Some lenders and loan programs may
consider other records of payment, like utility bills and rent reports from
with your loan officer to determine which of the above issues might apply to
you, and take the steps to correct them. Then,
you can finance the home of your dreams!
Hugh â€œScooterâ€ Willey
If you enjoy my blog posts, then letâ€™s Network more, here is my LinkedIn Profile