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   ARTICLE   |   From Scotsman Guide Residential Edition   |   May 2016

Don’t Leave Your Borrowers Stranded

Discuss discretionary guidelines with underwriters before submitting loan packages

Don’t Leave Your Borrowers Stranded

Few things are more heartbreaking to many mortgage professionals than hearing about consumers who were pre-approved for a purchase mortgage, only to find out at the last minute that they were never really qualified for their proposed financing. No originator wants to see their clients stranded like this.

These problems often arise when an underwriter denies these borrowers’ loan packages just days before the scheduled closing date. To avoid these situations, originators should know what issues may cause such a denial and how to work with underwriters to fix these issues before they cause major problems.

When financing falls through at the last minute, the results for borrowers can be awful. Renters who gave notice they would not renew their lease may find themselves without a place to live. Families that move across the country may end up living in a motel in their new town.

Failed refinances bring their own set of woes: deposits lost on planned home additions; once-in-a-lifetime vacations canceled; parents having to tell their children they can’t provide promised college tuition.

One root cause of these problems is the failure by loan originators to consult with underwriters about mortgage guidelines subject to interpretation. Some application scenarios are not explicitly covered within every agency’s guidelines. Others explicitly give underwriters the ability to exercise their discretion. Others give underwriters leeway to make a decision by custom.

Whatever the approach, it’s crucial for originators to reach a common understanding with their underwriters before submitting loan packages for final approval. If you fail to do this, not only is your reputation at risk, and that of your company’s, but you could find yourself the subject of consumer complaints — and, possibly, an audit from the Consumer Financial Protection Bureau.

Credit concerns

Sometimes, items in your borrowers’ credit profiles can give underwriters justification to overturn your automated-underwriting system approval. Tradelines that your applicants have formally disputed are not considered when calculating their credit scores. Even if the findings or a specific agency’s guidelines do not require resolving these disputes, underwriters could choose to reject a file if they think borrowers used the dispute mechanism to game the system. Similarly, if applicants have latched onto other people’s good credit by getting added as an authorized user, underwriters may be concerned that their credit score is not a true representation of their credit profile.

Deferred revolving-credit accounts based on furniture and other similar purchases often come with an interest- and payment-free period. In those cases, a credit report may show a specific payment that will begin at the end of that period, or your agency guideline may require a certain percentage of the balance get included in your borrowers’ debt-to-income ratio. Be careful, however. Because many borrowers strive to pay off these accounts in full before interest starts to accrue, underwriters may decide to hit your applicants with a payment that will accomplish that goal before the interest-free period ends.

Delinquent property insurance and property tax payments — past or current — can give underwriters enough concern about a file to deny a loan that they would otherwise approve. Even if your applicants use escrow for taxes and insurance, it is a good idea to ask them if they have ever been late on these payments.

When it comes to Department of Veterans Affairs loans, underwriters can explicitly choose to ignore and leave open some small collection accounts. If these collections have to be paid off and your borrowers are light on reserves, their liquid accounts may dip below the underwriters’ comfort level.

Show extra caution if you are working on a rescue mortgage for borrowers recently turned down for Federal Housing Administration (FHA) financing. If your application is to purchase the same property, it is difficult for FHA underwriters to approve a loan when their fellow underwriters recently denied the same borrower/property combination. Even if the rejection was from an overlay at the previous lender that your company doesn’t have, you could run into a problem here — and you don’t want to be the originator to promise approval to borrowers, only to let them down later in the process.

Even if your applicants use escrow for taxes and insurance, it is a good
idea to ask them if they have ever been late on these payments.

With any agency loan, if your borrowers have an established credit line with a zero balance, conservative underwriters could decide to hit your borrowers with whatever their payment would be if they maxed out this line.

Property problems

The news is not always bad when underwriters use their discretion. Sometimes, these decisions can work in your borrowers’ favor.

Condominium buildings may have a limit on the number of units that can be delinquent in their homeowners association (HOA) dues. If you are slightly over the limit, it can be worthwhile to see if your underwriters will accept this situation if the complex is within the percentage limits based on a dollar amount of the total dues owed.

Condominium loans also typically require a sufficient level of reserves on deposit in the HOA account. If the subject complex is slightly below the required percentage because of a recent large expenditure, your underwriters may allow an exception, especially if the budget shows that the necessary level will be reached again in the near future.

Income Issues

Many loan programs require a two-year work history to use overtime or bonus income. If your applicants, however, have jobs where overtime is mandatory or their bonuses are guaranteed, you can seek to have that income counted, even without them having received it for two years.

It is common for underwriters to allow qualifying income for borrowers who are temporarily out of work, or on maternity, family or disability leave. They may, however, have some discretion over whether to use the regular salary (typically depending on if, and when, employers confirm their employees’ return date) or to only allow the amount of income actually coming in during the leave. In that case, they may allow any excess borrower reserves to substitute for the amount of reduced income during the leave period.

Many self-employed borrowers seek tax extensions for their various business entities. It is still a requirement for filers to remit the estimated amount of taxes owed by the time those payments would have been due had they not sought an extension. If your applicants have not remitted those taxes, check with your underwriters to see if they will still allow you to use any income generated by that entity. If that is allowed, underwriters may decide to reduce your borrowers’ qualified reserves by the amount of taxes due.

•  •  •

It only takes a few extra minutes to think about each file and decide if your underwriters’ discretion could cause your loan to fall apart. If you are originating a type of loan you don’t have much recent experience with, set up a coffee or a lunch meeting with one of your fellow originators who has more expertise identifying concerns with that particular type of file. Handling your loans in this manner is good business for you, your company and the consumers who have trusted you to handle a major financial transaction for them. 


 


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