What Is Loan Underwriting

Dated: 06/17/2014

Views: 1171

First and foremost, you have to understand the nature of the transaction. A mortgage loan is a lien on a deed of a real property. A loan is measured on the likelihood that a borrower will repay and the value of the collateral. The reader must also understand that most Mortgage Lenders sell their loans and most lender guidelines are driven by the Fannie Mae Selling Guide. If a lender does not follow these rules, the loan may be deemed non saleable and the lender must keep the loan. This post can easily become a novel or a direct quote from the Fannie Mae Selling Guide; it is a simplistic insider view of the underwriting process using property, assets, credit, income & transaction (PACIT). 
  1. Property: For the purpose of simplicity, we are only focusing on Single Family Residence (SFR), Condos and 2 – 4 Multi-Family Units. The most common is a detached SFR. If you have opted for this type, your transaction will be smoother. From a lender view, a transaction that involves little liability from lien position is the safest. The other main criteria is marketability in the case of a possible foreclosure, however the more liability from external entities, the more documentation that is needed to ensure a safe transaction for the lender. For example a Condo may require a questionnaire be filled out by the Management Company to ensure 50 percent+ are owner occupied. An experienced buyer’s agent will understand the nuances of each type of property and can guide you by pointing out possible issues that certain properties may have.
  2. Assets: Now that the lender knows the property type, they will focus on the borrower. Contrary to popular belief, most banks do not consider a higher down payment as a compensating factor. Keep your money! The more documented money you have, the better. Lender jargon would call this “reserves”.  For example, if your housing payment was $1,500 and you have $9,000 in documented savings, than your reserves are equal to 6 months. $9,000 (Savings) / $1,500 (Payment) = 6 Months. To further hammer this idea in, the more money you have in the bank the more likely a borrower has the capacity to withstand a rainy day and still fulfill their monthly mortgage obligation. 
  3. Credit: We will not focus on the credit score, rather on what items a lender looks at on the credit report that could hinder an approval. To accolade the importance of a lenders lien position the credit report is scanned for possible threats such as judgments or tax liens. Furthermore, a credit report identifies monthly debt obligation. The more debt you have, the less home you may qualify for. The industry jargon is Debt to Income Ratio. This goes right into the next segment.
  4. Income: Most lenders use a standard 28/41 rule to measure the amount of home a borrower can qualify for. This is covered in more depth in my Understand Your Buying Power post. Our economy has many variance of income. A person can get paid with a W2, 1099, piece meal, child support, LES, K1, Notes Receivable, etc… A lender will ask for paystubs, all schedules of tax returns and pull federal transcripts. Although the primary reason for a lender to obtain income documentation is to measure affordability, it has to identify an accurate monthly income and identify the likelihood of continuance.
  5. Transaction: As there are different types of property and income, there are different transactions. The most common is an owner occupied, arm’s length purchase. This is when a Buyer intends to live in the property and purchase it from a stranger. If it is not this combination, more documentation will be required to ensure lien position and likely hood of borrower meeting monthly mortgage obligation. An example of more documentation is 18 months of mortgage payments to be proven by seller if the two parties are related. 
In a perfect world, a person whom is paid hourly and whose W2 matches tax returns and transcripts with a good credit score and not a lot of debt purchases an owner occupied SFR from a complete stranger.  This is seldom the case. Although there are several great loan officers out there, they cannot see themselves through an experienced third party’s view such as an experienced buyer’s agent. A loan officer is limited by their investor and guidelines. As I have stated before, LENDERS ARE NOT CREATED EQUAL. Call a Pro Realty Group Agent. Experience is knowledge and knowledge is power. 

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