The media has it all wrong – securing
mortgage approval and satisfying credit underwriting guidelines are not the
difficulties plaguing mortgage consumers. It’s in meeting the rigorous
documentation requirements that most people fall flat. The good news is, the fix is simple. Just scan, photocopy, fax, and
deliver every aspect of your financial life. Then, shortly before closing,
check everything again.
Mortgage consumers who enter the mortgage
approval process ready to battle their chosen mortgage lender will come out
with a nightmare story to tell. As the process, requirements, and guidelines
are the same for everybody, your mindset is the game-changer. Accepting
the redundant documentation necessary for lender approval will make everyone’s
life easier.
When I was a kid, my father occasionally
issued directives that I naturally thought were superfluous, and when asked why
I needed to do whatever it was he wanted me to do, his answer was often:
“Because I said so.” This never seemed to address my query but always left me
without a retort, and I would usually comply. This is exactly what consumers
should do during the mortgage approval process. When your lender requests what
seems to be over-documentation and you wonder why you need it, accept the
simple edict – “because I said so.” You will find the mortgage approval process
much less frustrating.
So, what’s the perfect loan? Well, it’s one
that (a) pays back the lender and (b) pays back the lender on time.
Underwriting the perfect loan is not the goal that mortgage lenders aspire to
today.
The real goal is the perfect loan file.
Mortgage lenders have
suffered staggering losses and gone out of business because of the dreaded loan
repurchase.
As mortgage delinquencies increased, Fannie Mae and Freddie Mac began to audit
mortgage loans they had purchased and discovered substandard and fraudulent
underwriting practices that violated representations and warranties made,
stating these were high quality loans. Fannie and Freddie began forcing the
originating lenders of these “bad” loans to buy them back. So a small
correspondent mortgage lender is forced to buy back a single mortgage loan in
the amount of $250,000. This becomes a $250,000 loss to a small mortgage
business for a single loan, because it will never be repaid.
It doesn’t take many of these bad loan
buybacks to close the doors on many small mortgage operations. The lending
houses suffered billions of dollars of losses repurchasing loans from Fannie
and Freddie, and began to do the same thing for loans they had purchased from
smaller originators.
The small and medium sized mortgage
originators that survived created underwriting guidelines and procedures to eliminate
the threat of future loan repurchase losses. The answer? The perfect loan file.
It’s no longer necessary to have excellent
credit, a big down payment and stable employment with income sufficient to
support your debt service to guarantee your loan approval. However, you must
have a borrower profile that meets the credit underwriting guidelines for the
loan you are requesting. And, more importantly, you have to be able to
hard-copy-guideline-document your profile.
Every nook and cranny of your financial
life has to be corroborated, double- and triple-checked, and reviewed again
before closing. This way, if the originating lender has created a loan file
that is exactly consistent with published underwriting guidelines and has
documented while adhering to those guidelines, the chances are that your loan
will not be subject to repurchase.
Borrowers also need to prepare for
processing and underwriting. Processors and underwriters are the people trained
and charged with gathering (processors), all of your required-for-approval
financial documents, and then approving (underwriters), your loan. You can
assume these people are well trained and very experienced, as they are tasked
with assembling and approving a high-quality-these-people-will-pay-us-back loan
file. But just how do they go about that?
The process begins with the filter – the
loan originator (a.k.a loan officer, mortgage consultant, mortgage adviser,
etc.) – tasked to match the qualifications of a particular mortgage deal to the
appropriate underwriting guidelines. It is the filter’s job to determine if a
loan scenario is approvable and to gather the documentation to support that
determination. It is here, at the
beginning of the approval process, where the deal is made or broken.
The rest of the approval process is just papering the file.
The filter determines whether the
information provided by the borrower can be validated and documented. This is
simple, since most mortgages are approved by automated underwriting engines
such as Desktop Underwriter, and the automated approval generates a list of the
documents needed to paper the loan file. An underwriter can, at this stage,
request additional supporting documentation evidence at their discretion, as
not all circumstances neatly fit into the prescribed underwriting box. If
the filter creates a loan file with accurate information, then secures the
documentation resulting from the automated underwriting findings, the loan will
close uneventfully.
So, let’s begin with the pre-approval call.
Mortgage pre-approval is typically accomplished with a telephone interview. A
prospective borrower calls a mortgage rep (filter), and the questions begin.
There will be lots of questions as this critical phase of the process is akin
to the discovery period in a trial – you’ll need to disclose everything. Expect
to answer queries on what you do for a living, how long you’ve been employed in
your current field, and what your salary is. If there is a co-borrower, they
will have to answer the same questions.
Every
dollar in checking, savings, investments and retirement accounts, also known as
assets to close, as well as gifts from relatives and non-profit grants, has to
be accounted for. Essentially everything appearing on a borrower’s
asset-radar-screen has to be documented and explained.
If you were previously a homeowner and sold
your home in a short sale, or if you own a home now and plan to keep it as an
investment or rental property, there are new and specific underwriting
guidelines created just for you. In these cases, full disclosure of your credit
and homeownership past can potentially eliminate unforeseen mortgage approval
woes. For instance, Fannie Mae has a new underwriting guideline called
“Buy-and-Bail,” for current homeowners’ planning on keeping their existing home
as an investment/rental property. Properties not meeting the 30% equity test
for “Buy-and-Bail” result in additional asset requirements to purchase a new
home. Buyers with a short sale history may have to wait two to three years before
they are eligible for mortgage financing again. Full vetting of your previous
mortgage life will save you the dreaded we-have-a-problem call from your
mortgage lender.
It
all comes down to your proof. If the lender asks for a specific document, give them
exactly what they are asking for, not what “should be OK,” – because it won’t
be. This is where the approval process tends to go off the rails, when the
lender asks for specific documentation and the borrower supplies something
else. Here, too, is where both sides get frustrated. So if the lender asks for
a bank statement and there are 5 pages for that bank statement, send them all 5
pages, and not just the summary. If you send them the summary page and they ask
again, don’t complain that the lender keeps asking for the same thing when you
never sent it in the first place. This may sound elementary, but the vast
majority of mortgage approval process woes stem from scenarios just like this.
The reason the mortgage
approval process is now so rigorous is simple. Avoiding defaults and loan
buybacks has become the primary goal of mortgage lenders.
Higher standards are reducing loan defaults, which should mean fewer
foreclosures in the future. Government data shows that less than 2% of loans
originated in 2009, that were resold to Freddie Mac and Fannie Mae went into default after 18 months, down
from more than 22% default rates for 2007 loans.
So when your lender requests specific
documents from you, you may want to give it to them, just “because they said so.”
You can thank my dad for that.
Until next time…
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