Underwriting Tightened to Avoid Recurring Problems

As the mortgage crisis has unfolded, a recurring theme
has been: "How did it get this bad? Why didn't someone
take a closer look at what they were doing?"

Over the past several years prior to the mortgage
market's upheaval, there is no doubt that the process
had gotten very lax. It may be fair to say that all
the parties to the process thought that someone else
was making sure that everything was done properly.

The reality was that each step was done well enough
to advance it to the next level, but that no one took
ultimate responsibility for making sure that it was
all done correctly.

That has changed now.

Underwriters are now taking a very close look - a very
close look - at all elements of your application package.

Let's take a look at some of the areas that there is
more scrutiny, based on some recent experiences.


Employment:

Underwriting guidelines have always focused on job
stability over the previous two years. This does
not mean that you cannot change jobs, but the lender
is looking for continuity in a career field, and
lateral or upward moves to the new job.

For a person who receives hourly pay or a salary,
copies of W-2 forms for the last two years, a current
year-to-date paystub, and a verification of employment
(VOE) form that is completed by the employer would be
necessary.

The underwriters are now very diligent about cross-
checking all of these documents for any inconsistencies
and requiring clarification and letters of explanantion
for them. No matter how insignificant the discrepancy
may be, the underwriter wants it explained and they want
to make an assessment on all the facts.

What this means to you is that when we meet, we need to
discuss your situation and make sure that we have a
tight timeline and that all the numbers fit together
well. We want the presentation to the lender to be
very clean.


Self-Employment:

The two-year time requirement is also the guideline
for a person in business for themselves, or who derive
their income from commissions.

In this case, the lender wants two years of federal
tax returns, and possibly a current year profit-and-
loss statement.

If the income has increased from year-to-year, the
lender will average the income. If the income has
decreased, they will tend to use the lower figure
for what they define as stable income. They have
no way to assess whether income that is moving
downward is an aberration or truly a trend.

What this means to you is that you may need to think
ahead if you are planning to purchase or refinance
in the near future. Recognizing that the lender is
going to use the same information for income that you
are using to minimize your tax obligation may allow
you to make different choices when you put your tax
information together.


Asset Verification:

Verification of your bank accounts, investment accounts,
and retirement funds are important for the lender's review.

The guideline is to show current balances, as well as
the average balance for the last 60-90 days. The
lender is interested in seeing that the funds are
stable and seasoned in your name. If there have been
recent large deposits, the current balance and the
average balance will reveal the disparity.

The lender will want to know the source of the funds
that have recently arrived in your accounts. They will
need to come from a reasonable and acceptable source.

Deposits from bonuses, gifts from family members, or sale
proceeds from assets would typically be acceptable.

Deposits from personal loans, credit card advances, or
from unexplainable sources may not be acceptable.

What this means to you is that you need to pull together
your money well in advance of your loan application, or
be able to explain all the "new money" that arrives in
your accounts.

There is no substitute for strategic planning in advance.


Credit History:

Credit scores have become the big thing in mortgage
lending.

If you don't know your credit scores, and what is on
your credit report before you start the application
process, you could be unpleasantly surprised when you
are trying to obtain your home loan.

Increasingly, the lenders are offering their best
loan terms for borrowers with higher credit scores.
At one time, scores of 680 or more put borrowers in the
best position. Now, it is not uncommon for lenders to
want scores above 740 to offer preferential terms.

If you order your credit report in advance, you can
have the opportunity to make sure that all the items
are reported properly. And, if they are not, you can
get them corrected, processed through TransUnion,
Equifax, and Experian, and get your report re-scored
so that you can present the best possible picture to
the lender.

The underwriters will use the middle of the three
scores for the basis of the loan request, or if only
two scores are available, they use the lesser of the
two.

You are probably finding a recurring theme here.

Plan ahead. Take the time to sit down with me, fill
out some paperwork, run your credit report and let
me have the opportunity to assess your credit quali-
fications in light of current underwriting guidelines.

With all of the changes that have occurred in the
mortgage lending business, and how conservative
underwriting has become, it is the best way to help
you understand what to expect.