The media has it all wrong – securing mortgage approval and
satisfying credit underwriting guidelines are not the difficulties plaguing
mortgage consumers. It’s in meeting the rigorous documentation requirements
that most people fall flat. The good news is, the fix is simple. Just scan,
photocopy, fax, and deliver every aspect of your financial life. Then, shortly
before closing, check everything again.
Mortgage consumers who enter the mortgage approval process
ready to battle their chosen mortgage lender will come out with a nightmare
story to tell. As the process, requirements, and guidelines are the same for
everybody, your mindset is the game-changer. Accepting the redundant
documentation necessary for lender approval will make everyone’s life easier.
When I was a kid, my father occasionally issued directives
that I naturally thought were superfluous, and when asked why I needed to do
whatever it was he wanted me to do, his answer was often: “Because I said so.”
This never seemed to address my query but always left me without a retort, and
I would usually comply. This is exactly what consumers should do during the
mortgage approval process. When your lender requests what seems to be
over-documentation and you wonder why you need it, accept the simple edict –
“because I said so.” You will find the mortgage approval process much less
So, what’s the perfect loan? Well, it’s one that (a) pays
back the lender and (b) pays back the lender on time. Underwriting the perfect
loan is not the goal that mortgage lenders aspire to today.
The real goal is the perfect loan file.
Mortgage lenders have suffered staggering losses and gone
out of business because of the dreaded loan repurchase. As mortgage
delinquencies increased, FannieMae and FreddieMac began to audit mortgage loans
they had purchased and discovered substandard and fraudulent underwriting
practices that violated representations and warranties made, stating these were
high quality loans. Fannie and Freddie began forcing the originating lenders of
these “bad” loans to buy them back. So a small correspondent mortgage lender is
forced to buy back a single mortgage loan in the amount of $250,000. This
becomes a $250,000 loss to a small mortgage business for a single loan, because
it will never be repaid.
It doesn’t take many of these bad loan buybacks to close the
doors on many small mortgage operations. The lending houses suffered billions
of dollars of losses repurchasing loans from Fannie and Freddie, and began to
do the same thing for loans they had purchased from smaller originators.
The small and medium sized mortgage originators that
survived created underwriting guidelines and procedures to eliminate the threat
of future loan repurchase losses. The answer? The perfect loan file.
It’s no longer necessary to have excellent credit, a big
down payment and stable employment with income sufficient to support your debt
service to guarantee your loan approval. However, you must have a borrower
profile that meets the credit underwriting guidelines for the loan you are
requesting. And, more importantly, you have to be able to hard-copy-guideline-document
Every nook and cranny of your financial life has to be
corroborated, double- and triple-checked, and reviewed again before closing.
This way, if the originating lender has created a loan file that is exactly
consistent with published underwriting guidelines and has documented while
adhering to those guidelines, the chances are that your loan will not be
subject to repurchase.
Borrowers also need to prepare for processing and
underwriting. Processors and underwriters are the people trained and charged
with gathering (processors), all of your required-for-approval financial
documents, and then approving (underwriters), your loan. You can assume these
people are well trained and very experienced, as they are tasked with
assembling and approving a high-quality-these-people-will-pay-us-back loan
file. But just how do they go about that?
The process begins with the filter – the loan originator
(a.k.a loan officer, mortgage consultant, mortgage adviser, etc.) – tasked to
match the qualifications of a particular mortgage deal to the appropriate
underwriting guidelines. It is the filter’s job to determine if a loan scenario
is approvable and to gather the documentation to support that determination. It
is here, at the beginning of the approval process, where the deal is made or
broken. The rest of the approval process is just papering the file.
The filter determines whether the information provided by
the borrower can be validated and documented. This is simple, since most
mortgages are approved by automated underwriting engines such as Desktop
Underwriter, and the automated approval generates a list of the documents
needed to paper the loan file. An underwriter can, at this stage, request
additional supporting documentation evidence at their discretion, as not all
circumstances neatly fit into the prescribed underwriting box. If the filter
creates a loan file with accurate information, then secures the documentation
resulting from the automated underwriting findings, the loan will close
So, let’s begin with the pre-approval call. Mortgage
pre-approval is typically accomplished with a telephone interview. A
prospective borrower calls a mortgage rep (filter), and the questions begin.
There will be lots of questions as this critical phase of the process is akin
to the discovery period in a trial – you’ll need to disclose everything. Expect
to answer queries on what you do for a living, how long you’ve been employed in
your current field, and what your salary is. If there is a co-borrower, they
will have to answer the same questions.
Every dollar in checking, savings, investments and
retirement accounts, also known as assets to close, as well as gifts from
relatives and non-profit grants, has to be accounted for. Essentially
everything appearing on a borrower’s asset-radar-screen has to be documented
If you were previously a homeowner and sold your home in a
short sale, or if you own a home now and plan to keep it as an investment or
rental property, there are new and specific underwriting guidelines created
just for you. In these cases, full disclosure of your credit and homeownership
past can potentially eliminate unforeseen mortgage approval woes. For instance,
FannieMae has a new underwriting guideline called “Buy-and-Bail,” for current
homeowners’ planning on keeping their existing home as an investment/rental
property. Properties not meeting the 30% equity test for “Buy-and-Bail” result
in additional asset requirements to purchase a new home. Buyers with a short
sale history may have to wait two to three years before they are eligible for
mortgage financing again. Full vetting of your previous mortgage life will save
you the dreaded we-have-a-problem call from your mortgage lender.
It all comes down to your proof. If the lender asks for a
specific document, give them exactly what they are asking for, not what “should
be OK,” – because it won’t be. This is
where the approval process tends to go off the rails, when the lender asks for
specific documentation and the borrower supplies something else. Here, too, is
where both sides get frustrated. So if the lender asks for a bank statement and
there are 5 pages for that bank statement, send them all 5 pages, and not just
the summary. If you send them the summary page and they ask again, don’t
complain that the lender keeps asking for the same thing when you never sent it
in the first place. This may sound elementary, but the vast majority of
mortgage approval process woes stem from scenarios just like this.
The reason the mortgage approval process is now so rigorous
is simple. Avoiding defaults and loan buybacks has become the primary goal of
mortgage lenders. Higher standards are
reducing loan defaults, which should mean fewer foreclosures in the future.
Government data shows that less than 2% of loans originated in 2009, that were
resold to Freddie Mac and Fannie Mae went into default after 18 months, down
from more than 22% default rates for 2007 loans.
So when your lender requests specific documents from you,
give it them just “because they said so.”
You can thank my dad for that.
Mark Greene, Contributor
The Perfect Loan – Forbes