| Here are five quick tips loan originators can use to help | | | | Second, if the loan is later unexpectedly downgraded |
| prevent FHA mortgages from falling through during | | | | to refer status, much more documentation is needed. |
| processing. For some mortgage originators these tips | | | | Here are a few quick but painful examples of that. |
| will seem ridiculously basic. Unfortunately, conversations | | | | When there is no valid automated approval the |
| with FHA underwriters show me that many loan | | | | borrower's rental history must be verified. I have seen |
| officers haven't caught on to these ideas yet. | | | | many loans fall through at this stage because the loan |
| 1. Make sure the loan you are submitting makes | | | | officer failed to even ask the borrower if their rent had |
| common sense. | | | | been paid on time! Remember, the rental history is not |
| Incredibly, this is one of the most common mistakes | | | | a factor if the loan is approved by automated |
| made by originators who entered the mortgage | | | | underwriting because that history is not shown on a |
| business within the last 5 to 7 years. Subprime | | | | borrower's credit report. |
| programs generally only required that the loan fit into | | | | Another common version of this problem occurs when |
| their matrix and never cared about the reasons the | | | | the loan officer fails to examine documentation |
| person had credit problems. Make sure that you can | | | | showing that extra income (for example, child support |
| verbalize a good case that it makes sense to believe | | | | payments) has been received consistently in the past |
| that this borrower can reasonably be expected to | | | | and that payment is going to continue. Again, the loan |
| make the payments on the loan. Often this requires | | | | ends up falling apart well into the processing stage, |
| asking a lot of uncomfortable questions of the | | | | leading to much greater frustration and anger from |
| borrower to make sure that you truly understand their | | | | borrowers and real estate agents thus disappointed. |
| situation. Even when your submission is approved by | | | | An equally common mistake is not verifying that a |
| the automated underwriting system and theoretically | | | | retirement account submitted on the application as an |
| the underwriter needs only to validate the information | | | | asset can legally be liquidated if necessary. For |
| and does not need to make a credit decision, the | | | | example, many teachers have substantial funds in their |
| underwriter may well find something wrong if the loan | | | | retirement accounts, but these funds often can not be |
| does not make common sense. Lenders are held | | | | liquidated unless the teacher is fired or dies. These |
| accountable by HUD for loans that default. They can | | | | funds are not considered to be liquid assets but many |
| always find a reason to override the automated | | | | rookie loan officers get automated approvals based |
| underwriting findings if they want to. | | | | on these funds which subsequently go down in flames. |
| Stating a good case for loan approval is even more | | | | 4. Compute the income accurately. |
| important when the FHA Total Scorecard underwriting | | | | Sounds obvious, I know, but tales of mortgage closings |
| system has referred your loan to an underwriter to | | | | which fall through because the borrower's ratio of debt |
| make the decision. Do not ever assume that just | | | | to income is too high are legion among real estate |
| because the debt to income ratios meet guidelines and | | | | agents as they swear to never use that particular |
| the borrower hasn't been late on any payments in the | | | | mortgage broker or lender again. Real estate agents |
| last 12 months that you don't need to submit a well | | | | and borrowers are reasonably amazed that such a |
| constructed cover letter with your loan - in addition to | | | | basic element of the loan approval process could have |
| the borrower's own credit explanation. Make sure that | | | | slipped by the mortgage originator's attention until so |
| both your cover letter and the borrower's explanation | | | | late in the process. |
| fully account for what happened to cause the | | | | Here's what happened. The loan officer asked the |
| borrower to have credit problems and why the | | | | borrower "How much do you make?". The borrower |
| underwriter should now believe that the borrower has | | | | told them an amount from their last paycheck, or |
| solved the problem. | | | | worse an amount from their best paycheck. The loan |
| Loan officers who "grew up" in the days of subprime | | | | officer submitted the loan through automated |
| lending based on credit scores and matrices often | | | | underwriting and received an approval so they told the |
| foolishly leave it up to the underwriter to probe through | | | | agents and borrower to go ahead with their purchase |
| a huge stack of papers in the submission to come up | | | | offer only to find out after finalization of the purchase |
| with their own justification for approving the loan. Rest | | | | contract that 30% of the borrower's income comes |
| assured that the underwriter is too busy to do that and | | | | from overtime pay they have only been receiving for |
| will only gripe about you to their colleagues after they | | | | the last year. Oops, this doesn't fit into FHA guidelines. |
| give you an approval with a stack of conditions which | | | | Alternatively, the loan officer does look at the |
| are often impossible to comply with. This is one of the | | | | borrowers paycheck ahead of time, but fails to note |
| most common rookie causes for real estate closing | | | | that part of the gross pay comes from overtime or |
| delays. Let the underwriters know what you want | | | | bonus pay or commission pay. So the originator |
| them to base their decision on and you stand a | | | | submits the gross income, but it isn't entered into the |
| greater chance of getting an easy approval with | | | | system correctly and factors such as commission |
| conditions you can comply with. | | | | income actually play an important part in the |
| 2. Check the CAIVRS number before processing the | | | | automated systems risk analysis of the loan. Either |
| loan. | | | | way the result is not good for the parties involved. |
| CAIVRS stands for Credit Alert Interactive Voice | | | | One effective strategy to prevent this is to be very |
| Response System. Don't ask me why HUD | | | | conservative in determining the borrower's qualifying |
| sometimes transposes that to CAVIRS instead of | | | | income and not count bonuses and overtime pay |
| CAIVRS in their own documentation. I guess it | | | | when submitting the loan for automated approval |
| sometimes serves their purposes to keep the public | | | | unless absolutely necessary. If the borrower has been |
| confused? | | | | qualified with less than the maximum income that can |
| The CAIVRS system verifies that the borrower has | | | | be squeezed into the loan officer's calculations, |
| not been disqualified from using government insured | | | | unpleasant surprises are less likely to occur. |
| financing because of past defaulted FHA/VA | | | | 5. Be sure you have ALL the borrowers assets listed |
| mortgages, student loans, or any of several other | | | | and listed correctly. |
| reasons. An amazing number of people are not aware | | | | Loan officers frequently fail to gather complete |
| that they have officially been excluded from FHA | | | | information on all the borrower's assets once they |
| financing. This commonly happens due to "charged off" | | | | have an automated approval. Once again, automated |
| student loans that the borrower may have long | | | | approvals are downgraded to "referred to underwriter" |
| forgotten about and which also do not show up on | | | | status fairly frequently for many strange and different |
| their credit report any longer. Just slightly less common | | | | reasons. A good strategy for the mortgage originator |
| are cases where the borrower's ex-spouse was | | | | is to gather documentation for every dime in every |
| foreclosed upon and the borrower says they were | | | | account the borrower has squirreled away anywhere, |
| not even aware of the situation. Strangely, even this | | | | but submit the loan through the automated underwriting |
| fails to show up on the borrower's credit report fairly | | | | system with the fewest assets necessary to get an |
| often. | | | | approval. When the loan is downgraded later on, the |
| Whatever your company's procedures, make sure | | | | extra assets can often save the loan officer's |
| you check the CAIVRS as early as possible. | | | | reputation. |
| 3. Collect all the correct documents. | | | | Another common mistake regarding assets has |
| Make sure you have documentation to support the | | | | already been mentioned. The assets must be verifiably |
| information you entered into the automated | | | | liquid. For this reason, FHA guidelines require that the |
| underwriting system, or that was mentioned in your | | | | loan file include proof that the assets would be |
| cover letter and the borrower's explanation letter. | | | | available to the borrower without being fired or dying. In |
| Surprisingly again, many loan originators fail to think | | | | addition, due to potential withdrawal penalties, FHA loan |
| ahead strategically when compiling their loan | | | | guidelines will allow only 60% of the vested amount of |
| submission package. Loans which started out with an | | | | the account to be counted towards the borrower's |
| approval from FHA Total Scorecard often revert while | | | | liquid reserves. Frequently, the entire balance has been |
| in process to a "referred to underwriter" status. | | | | submitted into the automated underwriting system. |
| First, this would occur much less often if originators | | | | These 5 tips won't guarantee your deal will go through |
| took the extra few minutes necessary to verify the | | | | underwriting without a hitch. After all, FHA guidelines |
| information being submitted by examining original | | | | seem to change daily now, but a little attention to these |
| paystubs, W2s, divorce decrees, bankruptcy filings and | | | | details will go a long way toward improving your |
| other support documentation before turning the loan | | | | reputation among borrowers and real estate agents. |
| over to their processor. | | | | |