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   ARTICLE   |   From Scotsman Guide Residential Edition   |   May 2017

Avoiding Underwriting Pitfalls

Ask the right questions during preapproval to head off issues

r_2017-05_Pataky_spotIt’s an all too common scenario in the mortgage process: A borrower has filed the required documents and feels confident moving forward with the loan, until that borrower is suddenly hit with a problem during underwriting. This may cause a significant delay in the loan process and require unforeseen legwork, leaving the borrower wondering why the issue didn’t come up in the initial consultation with the originator.

Although it’s impossible for originators to always identify potential problems that may come up during underwriting, they can play an important role in streamlining the loan process by recognizing red flags through their initial contact with the borrower.

The primary path to identifying potential roadblocks with a loan is for originators to know their bank’s investor guidelines like the back of their hand. These guidelines outline how loans are underwritten. The more loan officers familiarize themselves with their lender’s requirements, the better they will become at noticing discrepancies in loan applications. More importantly, they will be able to pose the right questions to their borrowers early on, which will help avoid surprises during underwriting.

Initial information

Every lender has slightly different guidelines, but there are a few common questions originators should ask during initial loan consultations and information they should determine shortly afterward to get a complete picture of a borrower’s financial background and mortgage needs.

Although it may seem standard, originators should be sure to ask about the loan amount the borrower is seeking and the range of home prices and locations they are considering because different counties designate different loan limits. What is referred to as a jumbo mortgage, for example, might be any loan above $625,000 in one county, but $417,000 in another.

This information also will be necessary later to help the underwriter ensure that the lender isn’t taking on too much risk and that the loan amount doesn’t exceed the value of the home. Keep in mind that if an originator or borrower uses online real estate sites to gauge home prices, they should also check recent home sales in the area, because appraisers will consider the most recent sales when determining the home value used for loan qualification.

Once originators have determined the loan amount and location of a property, they can calculate the client’s loan-to-value (LTV) ratio by dividing the loan amount over the home value or price, whichever is lower. They should then note whether the LTV falls within the parameters outlined in their investor guidelines for that mortgage product. Having a higher LTV does not necessarily mean a loan will get rejected, but it plays a key role in determining the interest rate, borrowing costs and the potential for any additional requirements, such as private mortgage insurance (PMI). 

Creditworthiness also is a huge factor in the mortgage process, because it demonstrates a borrower’s ability to repay a mortgage. As with LTV, credit ratings are an important determinant of a borrower’s interest rate and ultimate loan approval.

Although they are often related, income and employment are not the same thing.

To detect potential issues with borrowers’ credit scores in advance, ask about late payments, collections, defaults, second mortgages and home equity lines of credit they may have on their report. Although these may not be the most comfortable questions to dive into on a first meeting, understanding whether a borrower has any bankruptcies, foreclosures or short sales in their history can help originators manage expectations out of the gate.

Additional questions

Originators should find out upfront whether a borrower has other properties and, more importantly, whether they have mortgages or home equity lines of credit on those other properties. Often, these types of loans are the largest financial obligations that come up on a borrower’s credit report, so it is important that they disclose these debts upfront to ensure they can afford another significant monthly payment. Additionally, lenders often offer different pricing when the loan is for a primary residence versus a second home or rental property, so the intended occupancy of the property is a crucial detail to determine in the initial conversation.

Finding out about a borrower’s income and employment also is crucial. Although they are often related, income and employment are not the same thing and understanding a borrower’s specific employment situation early can help guide conversations about the loan amount. A self-employed borrower’s perceived income may be higher than the calculation an underwriter will use based on supplied tax returns. It is worth doing a quick upfront calculation to ensure that the income the borrower is reporting is sufficient for the loan.

In addition, even though closing may seem far off from the initial consultation, originators should ask borrowers early on how they will handle mortgage costs, including the downpayment and closing costs. If a borrower’s funds are tied up in nonliquid accounts like an IRA, that borrower will have to transfer these to a liquid account, which sometimes has an added fee. Some underwriters or closers also will require a paper trail to evidence the source of closing costs, so originators should warn borrowers of this upfront to avoid a last-minute scramble.

For borrowers who are refinancing — and especially if they are current borrowers with the same lending institution — the originator may be able to leverage old loan documentation and view past underwriting logs to see what roadblocks came up during the previous process and work to ensure that the same issues don’t block the process a second time around. Finally, it never hurts to go through the list of documentation that will be required from the borrower during the entire process, so that nothing comes as a surprise.

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This may seem like a lot of information to discuss upfront, but a comprehensive review of a borrower’s financial situation and desired loan size and type can uncover many potential problems that may come up during under-writing, ultimately saving time and stress down the line. Of course, there may still be roadblocks that arise during the process, but a detailed initial discussion between originator and borrower will help mitigate these risks and ensure that the originator offers the best, most transparent customer service.


 


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