From time-to-time during the mortgage application process a question will arise that will need further explanation. The underwriter’s concern about certain facts uncovered during her verification of the statements made on an application can usually be addressed in a Letter of Explanation signed by the borrower(s). A professional Loan Officer will usually pick them up during his interview. Here a few of the typical concerns that need to be addressed.
Credit Inquiries: If the borrower has a credit inquiry on their credit report dated within 120 days of their application, a Letter of Credit Explanation will be requested stating the purpose of the inquiry and whether or not any new debt was incurred as a result of the inquiry.
Joint Account Holder on Bank Account, But Not On Loan: If a spouse or an6y other person is a joint holder on a bank account where the funds will be used for the down payment or closing costs of a mortgage, a Full Access Letter will be required from that person confirming that they give the borrower 100% access to the funds to use in the transaction.
Address Discrepancy: If an address shows up on the credit report, pay stub, or bank statement that is not the same as the borrower’s current address on the application, or listed as any previous address on the application, a Letter of Explanation must be submitted explaining the discrepancy with dates the borrower occupied said address.
Derogatory Credit: If any derogatory credit trade lines appear on the credit report, a Letter of Explanation must be submitted stating what they are for and what event triggered the derogatory credit. If it is a significant event, stating how the borrower intends to prevent reoccurrence in the future will be very helpful.
o Documenting a file with the appropriate Letter of Explanation prior to submission of the application will save time in processing and underwriting.
o All Letters of Explanation must be signed and dated by the borrower
o Additional documentation that might better explain a questionable situation should be submitted with the Letter of Explanation
o Any new debt that was incurred as a result of the credit inquiry and is not shown on the credit report must be supported by a copy of the current monthly billing statement.
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Mortgage Underwriting is the process of verifying information about your employment, income, assets, debts, and credit history to determine if you can afford to pay back the mortgage loan you are applying for.
Mortgage Underwriters also verify that the size of the mortgage you’re applying for is reasonable compared to the value of the property you’re buying or refinancing.
Sound underwriting helps ensure that you qualify for a mortgage loan that you can afford to repay and it gives lenders the confidence to make mortgage money available to people who want to buy or refinance a home.
The Mortgage Underwriting process is basically divided into three parts:
1: Gathering and Verifying Your Information
Your lender, or your lender’s loan officer, collects and verifies your personal information, from your employment history to your outstanding debts.
You’ll be asked to give your lender permission to independently verify your information and obtain copies of your credit history.
Here’s a short list of the information you will need to begin underwriting your mortgage.
♦ Employment: You’ll be asked to document your current employment status and provide your job history, including the length and terms of employment.
♦ Income and Assets: Income is used to calculate the size of the mortgage you can responsibly afford and the size of the down payment you’ll need. Expect to provide proof of your primary income, such as copies of your W-2. You’ll also be asked to document other income sources and assets the underwriter may be able to use to evaluate your mortgage eligibility. Assets can include anything from bank accounts, retirement funds, investments and rental property, to your car.
♦ Debts: A list of your current debts – such as credit cards, auto loans, student loans – is needed to calculate your debt-to-income ratio. Underwriters use this ratio to determine if your available income will enable you to continue paying your outstanding debts and a new mortgage payment.
♦ Credit Report: Your credit report from independent credit bureaus(Experian, Equifax, and TransUnion) includes a record of your previous credit transactions … aka your credit history: plus a credit score based on proprietary formulas developed by the respective bureaus This information is used to help determine your creditworthiness and the likelihood that you’ll repay your mortgage.
2: Verifying Property Information
The appraised value of the property is another critical factor for determining how much you can borrow. Your lender will have the property you hope to buy professionally appraised to assess its physical condition, the condition of the surrounding site and neighborhood, and its value.
3: Putting It All Altogether
Finally, the Mortgage Underwriter reviews all of your information, either manually or with the help of an automated underwriting system to determine
a.) your financial capacity to repay the mortgage, and
b.) whether or not the mortgage you’re applying for, and the house you hope to buy or refinance, meets your lender’s requirements
Follow this blog to learn more about how things work in the mortgage industry or visit My Home by Freddie MacSM for additional information.
The Mortgage Underwriter is one of the most important people in the Mortgage Application process. Without the approval of an underwriter, no lender will fund or close on a loan. It is the job of the underwriter to ensure a borrower can repay the loan they are applying for and to determine that the sales price is supported by the appraisal value before granting lending approval.
Approval of a Mortgage Application is based on several things: income, credit history, debt ratios, and savings.
♦ A borrower must be able to prove a stable income and job history needed to repay the loan.
♦ They also must have a credit history that reflects a stable record of repaying obligations and a balanced debt to income ratio. Additionally, a borrower’s monthly debt must fall within acceptable limits determined by the loan product’s guidelines.
♦ Lastly the borrower must show that they have enough money saved for their down payment and closing costs. It is also smart to have a few months of mortgage payments saved away in case of an emergency.
It is the Mortgage Underwriter’s job to make sure all of these factors meet particular loan guidelines. The underwriter will evaluate all of this information and sometimes ask for more information or explanations from a borrower to clarify and support their decision on the Mortgage Application.
Mortgage Underwriters also review the Appraisal to make sure it is accurate and thorough, and that the home is truly worth at least the purchase price. A property’s appraised value is also reviewed by the underwriter to ensure the value supports the amount of the loan you are requesting. A good underwriter will also take into consideration the condition of the property, the location of the property and how it may be affected by natural disasters, such as floods.
An Mortgage Underwriter does his or her best to evaluate the potential risk involved when lending to a borrower. In January 2014, the Consumer Financial Protection Bureau enacted stricter requirements on some mortgages, which included tougher background checks into your bank account, spending and employment history. If an underwriter does not follow all guidelines and makes a poor lending decision and the loan defaults, meaning a borrower stops making payments on their mortgage, it could result in a hefty cost to the lender.
The Mortgage Underwriter has final approval and final responsibility for the Mortgage Loan. They must make important decisions based on the facts presented in the file, their own judgments and similar application experiences. The Mortgage Underwriter has to take a calculated risk and do his/her best to determine if a file adheres to not just the letter but the intent of the loan program guidelines. It is not an easy job.
The Consumer Finance Protection Bureau (CFPB) has implemented certain laws decreeing that before banks grant a mortgage they must make a good-faith effort to determine that First Home Buyers, will be able to pay the loan back. The Ability to Repay Rule (ATR) went into effect in January 2014.
Why is the Ability-to-Repay Rule Important?
The Ability-to-Repay rule will make sure that consumers assume mortgage obligations that they can afford and it protects all parties from the negative effects of loan defaults.
Lenders must determine that applicants for mortgage loans will have the ability to repay the loan. All lenders must collect and verify certain consumer financial information including:
1. Current or reasonably expected income or assets
2. Current employment status
3. Credit history
4. The monthly payment for the proposed new mortgage
5. Monthly payments on other mortgage loans you get at the same time
6. Monthly payments for other mortgage-related expenses (such as property taxes, homeowners insurance, mortgage insurance, Condo fees)
7. Other current debt obligations including child support and alimony payments
8. Borrower’s current monthly debt payments plus the proposed monthly mortgage obligation compared to the borrower’s monthly income.Your monthly debt payments, including the mortgage, compared to your monthly income is … the all important “debt-to-income ratio”
You must have enough assets or income to pay back the mortgage.
Lenders have to verify income and credit information from a reasonably reliable third-party source. The lender must determine that you can repay the loan. If your income shows on your tax return, you might be able to use it to qualify.
Be prepared to provide copies of bank statements, mutual fund and 401k statements to prove you have the ability to cover the down payment statements and closing costs and any reserves to cover any financial problems down the road. https://mortgagemarketdigest.wordpress.com/2013/03/14/mortgage-application-checklist/
The allowable Debt-to-Income Ratio is capped at 43 percent.
That is, once the mortgage is issued, the borrower’s fixed debt service costs, including the mortgage, credit cards, car loans, student loan debt, and nearly anything else recorded by the credit bureaus, a Borrower’s DTI cannot be greater than 43 percent of pre-tax income.
This isn’t a radical change. For years now, whenever I meet with a new buyer, I always ask about their comfort level with a mortgage payment. We discuss debt repayment, taxes, insurance and PMI and back into the mortgage amount they can afford. I can’t recall the last time we ever got close to this cap.
What will be the Impact on First Home Buyers?
Buyers will likely find a more stringent loan approval process that requires a lot more documentation verifying the statements made on the application. Lenders already pull a current credit report and verify employment just before issuing a “Clear-to-Close” on the file. Don’t be surprised if lenders start asking for additional documentation to re-verify income and assets just prior to closing too.
It’s really back to basics in the mortgage industry. That’s what it should be and should have been. If a buyer has worked hard to deserve a new home and can afford one, then they should be able to buy one. Regretfully, it has taken federal regulation to try and strike a balance between protecting consumers from predatory lending to uneducated, unsophisticated consumers, and shutting off the flow of credit to the housing sector.
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With today’s attractive rates, and my direct relationships with trusted lenders who offer a wide range of affordable mortgage programs, you just might be able to move into your new home this spring.
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