This is not your Grandma's housing market, that's for sure. How many of you have represented a buyer with a LSR issued by a lender that fell apart and killed your sale?
I sat on Capital Markets desks for the first 25 years of my lender career. We are now all living with risk management policies that must be enforced to comply with Fannie/Freddie/FHA guidelines and MBS securitizers to rebuild our housing industry. Last month, I heard someone say that it feels like we lenders must hold the applicant by their ankles and shake to see what comes out before closing a loan. I laughed at the time, but how true... Since stated income programs have disappeared making our job more difficult. Now that I am originating, I spend much of my time educating the homeowner about the process and setting expectations.
A solid loan approval cannot be obtained in 30-45 minutes. It might take that long to take a loan application, but a good pre-qualification means verifying the information given on the application. When was the last time you had a buyer with an 800 fico score, enough in the bank to pay cash at the closing table and willing to put 20% down for conventional financing, a stellar rental history, a W2 wage earner with two years of employment history and a bright future? We call that "creampuff" in the "biz", and they are rare. Homebuyers come in all shapes and sizes, and less than 5% of them fit the creampuff mold. The biggest issue I see with the LSR's that fall apart is when they don't START with a complete loan application.
Originator Checklist for Solid Loan Approval:
•· Take a complete Loan Application, including the yes and no declarations on the third page: This is a Fannie/Freddie form that was designed to assist the lender evaluate the applicant.
•· Pull tri merge Credit Report (your applicant may have to pay for this in advance).
•· Read the tri merge Credit Report Identity theft, deceased flags, mortgage histories, derogatory items that must be paid prior to closing.
•· Ask the applicant about any Credit issues they know of, or that show up on the credit report.
•· Ask about and obtain details of any prior housing related payment issues where payments were not made on time (Rental History, Short sales, foreclosure, ...).
•· Find out if the applicant owns other properties that may not show up on the credit report.
•· Review applicant's last two years W2s and most recent paystub. Obtain awards letters for passive income - the underwriter will want assurance this income will continue for at least three years.
•· Review two years tax returns for all Self Employed, 1099, or commissioned borrowers.
•· Verify the existence and source of down payment and cash required to close. Review the bank statements for source of down payment and closing costs. In most cases lenders are looking for these funds to be "seasoned" for two months. If a down payment assistance program is being used there are separate guidelines for qualifying - Borrowers need to be pre-screened by the housing agency offering the program, and the housing agencies could delay the buying process by 30 days while the borower obtains the education certificate required to use the funds.
•· Have a backup plan in case they do not qualify for the DPA. FHA requires a 3.5% down payment that can come from a relative.
•· Run an Automated Underwriting Decision on Fannie/Freddie/FHA/VA Loans.
•· Know as much as possible about the property being financed. Especially Condos, which have their own set of qualifying guidelines.
•· Discuss the condition of the property with the buyer's Realtor - Lenders cannot finance a property that does not meet health and safety requirements of the loan program.
This seems like a lot to consider, and the reason why most 30-minute LSRs fall apart later on. Privacy laws don't allow us to share every detail with the Realtor, but I can tell the Realtor that I have qualified them with the "list". Pre-Qualifying the buyer properly may take anywhere from 1.5 hours to a day or two, and will set up everyone for success. Even if I do all of the above, something can still go wrong, but these steps increase my odds to about 95%. A good originator has easy access to an underwriter, and attends educational classes at least monthly to stay abreast of credit policy and loan programs.
Any feedback from the AR community on 30 minute LSRs -vs- a two day SLR?
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