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, FannieMae and FreddieMac began to audit mortgage loans they
had purchased and discovered substandard and fraudulent underwriting
PERSONAL FINANCE
| 3/09/2012 @ 10:23AM | 3,690 views
The Perfect Loan File
Mark Greene
, Contributor
see photos
MoneyBuilder
MAKING SENSE OF YOUR FINANCES
The Perfect Loan File - Forbes Page 1 of 3
http://www.forbes.com/sites/moneybuilder/2012/03/09/the-perfect-loan-file-2/print/ 3/23/2012
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, doubleand
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.
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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,
FannieMae 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, give it them just
“because they said so.”
You can thank my dad for that.
This article is available online at:
http://www.forbes.com/sites/moneybuilder/2012/03/09/the-perfect-loan-file-2/
The Perfect Loan File - Forbes Page 3 of 3
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