There is an old adage in the mortgage industry that underwriters look for ways to turn down loans. That is far from the truth. Everyone in a mortgage company — including underwriters — knows that without closed loans, the company would cease to exist. Instead of getting upset over rejected loans, mortgage originators need to look at things from the underwriter’s point of view when reviewing their loan files.
It takes a team effort to originate, process, underwrite and close a loan. No one part survives without the others. Knowing and understanding underwriting guidelines will make your origination process that much smoother and easier.
Originators should understand why underwriters exist and the vital role they play in the stability of the mortgage industry. There is a reason why we have underwriters: It is to approve or decline a loan, as well as to ensure the company has fundable and performing loans in regards to collateral, capacity and credit that can be sold to secondary market investors.
Know your overlays
As a loan originator, your role in the process is to review company guidelines and overlays on loan programs so you can present your borrowers with the best alternatives. More than that, however, you should look at how your underwriter will view those guidelines and overlays — and what documentation is required to satisfy them.
If you still have questions after reviewing your company’s guidelines, pick up the phone and call your underwriter or send an e-mail asking for further clarification. It is better to know and educate yourself on the underwriting guidelines when starting the origination process than to push forward on the process and end up with a turndown.
Too often, originators just forward pay stubs from borrowers, for example, never even opening up the e-mails to review the documents and verify that they actually are pay stubs, or to see if there is anything different from previous pay stubs. A change in hours worked, a new garnishment, a decrease or increase in pay, an address change or new deductions are red flags originators need to watch for. These are areas the underwriter will review and, if your underwriter finds any discrepancies, additional conditions will likely be added.
Unfortunately, a lot of knowledge in this industry is learned “on the job” and “as you go.” The best way to teach yourself is to learn from your mistakes. When you receive a loan decision — whether good or bad — see what you can learn from it so you won’t make the same mistakes again.
You may think you know what collateral, capacity and credit are, for example, but have you gone the extra mile to see these terms from the standpoint of an underwriter looking at a loan file? Let’s take a look.
Collateral is the amount of equity the loan will have from the downpayment or available equity based in the property. Your underwriter will determine if the funds for the downpayment are sourced and seasoned by reviewing asset items and then approve or request supporting documentation to source the funds.
Capacity focuses on the borrower’s ability to repay the loan by reviewing income documentation such as pay stubs, W2s, 1099s, federal tax returns, profit-and-loss statements, balance sheets and business returns. Your underwriter may well request other supporting paperwork to prove receipt of income and that the income is likely to continue.
Credit comes from reviewing the borrowers’ credit report. Underwriters focus on the public records area, open collections and judgements. They also may need to review letters of explanation for name variations, overlapping addresses, Social Security number differences, reasons for late payments and recent credit inquires.
Put the pieces together
Underwriting a loan is like putting together a puzzle. Each piece plays a significant part in completing the process. Understanding the role of underwriting and how underwriters review and approve loans will ensure you have all of your pieces in line when presenting a borrower’s loan file to underwriting, which will make you a better loan originator.
Look for ways to have a smooth transaction for your borrower by addressing issues before conditions arise and kill the file. Set a goal on each loan you submit to underwriting that it should go straight to closing with no, or very limited, prior conditions attached.
“ One reason underwriters constantly ask for more information is that they often receive documents piecemeal. ”
If you like working with Veterans Affairs (VA) loans or U.S. Department of Agriculture (USDA) loans, for example, connect with the underwriter in your company (or at your lender) who works on those loans and ask that person how you can originate better VA or USDA loans to make sure your files get approved with fewer conditions.
Some originators will battle with underwriters, perhaps fighting for their borrowers over some underwriting condition they feel is ridiculous in an effort to get it waived. What ends up happening more often than not is these originators spend two days trying to get that condition waived and find they need to obtain the documentation anyway. Save the two-day headache and get the paper trail on that $600 deposit. Then, learn from that situation. Next time, you will be prepared by getting what you need to clear that condition from the start.
It also is important to be patient with the underwriting department when submitting loan conditions. One reason underwriters constantly ask for more information is that they often receive documents piecemeal. Learn from this and send all the documents at once so the underwriter’s touches-per-file go down. Lowering the touches will ultimately speed up the process and get your borrowers to the closing table faster.
To make this happen, set expectations up-front with your borrowers and real estate agents. Let them know that your goal is to make the process as smooth and stress-free as possible from start to finish. When working on a purchase transaction, if you need to get the real estate agent involved to help gather documents to clear those underwriting conditions and thus meet your closing date, do not hesitate to do just that.
Finally, don’t get mad or upset with your underwriters. They are only doing their job, which is looking out for the well-being and best interests of you, the borrower, themselves, the company and the company’s investors.
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When dealing with underwriting, it’s always better to get educated instead of upset. The more you learn about the conditions underwriters can attach to your files, as well as the documents you need to clear those conditions, the better an originator you will become.
Submitting files to underwriting with numerous pieces of the puzzle missing will only slow down the entire process. Do not be the wrench in the machine. Instead, work with underwriters to ensure a smooth and stress-free underwriting process for your borrowers.