Do you know what an Underwriter is looking at when evaluating your loan?

Do you know what an Underwriter is looking at when evaluating your loan?

If you don't, you should. 

Every Mortgage Professional should know how to underwrite a file as well as know the difference between good and bad risk. 

There is a level of risk in every loan.  The key to success is to understand the difference between good risk and bad risk.

Most of you have probably heard the term: Layers of Risk but do you fully understand what that means?  What exactly does Layers of Risk mean and how does it affect your loan?  The assessment of risk is based on the 3 C's; Credit, Capacity and Collateral.

 Credit (Willingness to repay)

• Adverse of derogatory credit information (or Credit Score)
• High Balance-to-limits (>50% of high credit limit in use)
• High overall utilization of revolving credit (>60% of revolving accounts are in use).  Are they a "heavy" user of debt?
• Credit history for a short duration
• Several inquiries
• Do they have any delinquent credit?  If so, what is the nature of the delinquency and is it likely to continue?  Are there collections?  If so, for how much and what are they i.e. Medical, Non-sufficient Funds Checks, Non-paid Utilities, etc.  This is an important aspect because it can tell an underwriter if the borrower might simply ignore obligations.

Capacity (Ability to repay)

• A housing payment-to-income ratio in excess of guidelines
• A debt-to-income ratio in excess of guidelines
• How long has the borrower been on their job or in their field of employment?
• How much of the borrower's monthly income goes directly to expected durability, in other words do they have residual income after all personal debts are paid including the mortgage?
• Cash-out Refinance (especially to Max LTV or to pay off high balance revolving debt)
• No reserves to "fall back" on in the event of an emergency or employment change
• Payment Shock: Is the borrower's payment increasing substantially, especially when there is not a pattern of savings from their previous payment?
• While some "higher DTI's" may be within guidelines, that doesn't mean the borrower can afford their obligation(s)

Collateral (The Property/Appraisal)

• Low equity/down payment
• Maximum financing (especially if a Cash-out transaction)
• Investment property, 2 to 4 Unit property, Manufactured Home or Condo
• What is the condition of the property?
• Are the comps good and within reason for the subject?
• Has the appraiser established the marketability for the subject in that neighborhood?
• Is the price / value within reason for the price range in the neighborhood?
• Are there other more "like" comps the appraiser has not used?
• Did the appraiser use comps that have sold within the past 90 days and listing/pending sale comps that also support the value?
• Is the property in a declining market or high foreclosure area?

In today's highly critical environment it is important to you, your borrower and to Assurity Financial that when you submit a loan you KNOW it's going to get approved the first time an Underwriter looks at it . . . And if they happen to not see it from your point of view, you need to be able to make a sound, logical argument built on industry standard underwriting risk.

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