Underwriting Guidelines
When a buyer is obtaining a mortgage to purchase real estate, the loan will eventually go to a dark and lonely place known as underwriting. I’m being a bit facetious, but the connotations surrounding “underwriting” are less than stellar. This also doesn’t top the list of what homebuyers get excited about when they are in the market to purchase a home. Regardless, underwriting is a necessary part of the process that all loans need to go through. I’m quite certain most of you reading this have had potential deals fall through during underwriting when an issue seemingly came out of nowhere to rob you of a happy transaction between the buyer and seller. The purpose of this article is to educate you on what happens in this dark, scary place known as underwriting. It should also shed some light on what I think a good lender should be doing initially to make this dreaded underwriting process a little bit more predictable.
When a buyer gets an initial pre-approval, there is a plethora of information that is taken from those buyers. Depending on the medium that is used (telephone, electronic, in-person), you may or may not have documentation to back up what they are saying. The more proactive a buyer is with getting their documentation to the lender, the easier it becomes for a lender to spot any potential problems.
One thing a lender can do after a pre-approval is completed, with or without supporting documentation, is run the loan through an Automated Underwriting System (AUS). Freddie Mac and Fannie Mae have their own AUS’s that most lenders utilize when determining if a buyer will qualify for the loan. USDA has their own automated underwriting system known as the Guaranteed Underwriting System (GUS). These automated underwriting systems hold the answers to what will need to be done to satisfy all of the requirements to get the loan to the closing table.
Many Realtors and consumers alike can rattle off some of the basic, relatively accurate assumptions of the mortgage process. For conventional loans you can go to around 43 percent for your debt ratios, for FHA you can go to 50 percent, etc. While these “myths” don’t really tell the full story, they aren’t horrible rumors to have out in the public. The truth of the matter is that the golden ticket for a mortgage isn’t your debt ratio, and it isn’t even your credit score. The key is that the AUS gives you a green light! Without that green light, you will have to get a non-traditional mortgage product to make your deal work.
A proactive lender is always a good lender. Assuming that the information is accurate up front, the AUS gives the lender the answers to what will be needed through the underwriting process. The attention to detail is always important as a number of factors can dictate what is required in underwriting. For example, the findings will state what is needed with regard to paystubs, tax returns, W2’s, etc. The AUS findings will also explain what is needed to document and utilize any overtime, commission or bonus income the buyer may receive on the loan application, provided they have a two-year history with their employer. The information given in the AUS findings should help make the process a little simpler and a little clearer for the buyer.
It is also of the utmost importance for buyers to be transparent and honest up front. Recently I had a transaction where a buyer told me the funds for closing were coming from her 401k. About a week into the transaction it was discovered that the funds for closing were coming from her husband’s 401k, and he was not on the loan due to credit reasons. We had to re-run the findings showing that gift funds were being used for closing instead of the buyer’s own funds, and it asked us for $2,500 in reserves. We were able to satisfy that requirement, but it led to more back-and-forth with the client than was desirable.
The goal of the initial AUS process is to essentially have all the information up front. In a perfect world, this information is communicated to the buyer, and he or she provides all the documentation that is needed as soon as possible. The underwriter’s job at that point becomes easier as they simply need to verify everything that was submitted to satisfy the AUS requirements. When the lender is proactive and the buyer is transparent, it should make for a hassle-free underwriting process, a clean mortgage approval and a happy settlement day for everyone involved.
David Fuchs, Traditions Mortgage
Facts, opinions and information expressed in the Closing Comments Blog represent the work of the author and are believed to be accurate, but are not guaranteed. The Lancaster County Association of Realtors® is not liable for any potential errors, omissions or outdated information. If errors are noted within a post, please notify the Association. Posts represent the author’s opinion and are not necessarily the opinion of the Association.
