Brokers must leap hurdles that underwriting and mortgage-insurance restrictions pose

Richard Smith, retail manager, American Acceptance Mortgage Inc.

As published in Scotsman Guide's Residential Edition, January 2010.

Conventional mortgage loans have become increasingly more difficult. Not only have agency standards tightened, but mortgage-insurance requirements also have added limitations. With manual restrictions in place, automated-underwriting approval no longer guarantees a loan will be approved for mortgage insurance.

These changes may impact your clients’ ability to get a mortgage as well as the price of that mortgage. Fannie Mae charges lenders a premium for different combinations of loan-to-value ratio (LTV), credit score and loan type. This premium is called the loan-level price adjustment. Freddie Mac has a similar tiered-pricing structure, called post-settlement delivery fees.

Most clients must have credit scores greater than 720 to avoid a credit-based delivery charge or price adjustment. For scores less than 720, price adjustments generally increase steadily for each decrease of about 20 points. Premiums can be as much as 3 percent.

Other additional adjustments exist for special features or properties, such as balloon notes, manufactured homes, investment properties or condominiums. Investment properties have large adjustments, from 1.75 percent to 3.75 percent, depending on the LTV.

Allowable LTVs and agency delivery fees also have tightened significantly for cash-out refinancing. At present, both agencies still allow cash-out refinances. The fees, however, can be as much as 3 percent, depending on the borrowers’ credit scores and the LTV. Then again, mortgage-insurance restrictions largely prohibit cash-out refinancing with LTVs greater than 80 percent.

According to fee schedules published this past year, Freddie Mac no longer will allow agency-approval cash-out refinances with LTVs greater than 80 percent beginning in February. Fannie Mae could have that change in the works, as well. This will be in line with the realities of the availability of mortgage insurance and the standards that existed before automated underwriting.

In some cases, delivery charges can be too large to be paid with premiums from the loan interest rate. For such loans, borrowers must pay the delivery charge at loan closing — an additional difficulty, especially for borrowers who are qualified but have credit scores that require an additional premium adjustment.

Many lenders impose additional restrictions based on their own agreements with the agencies and investors. Condominiums, manufactured housing or credit-score limits generally are areas that may have lender-specific restrictions.

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