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Ratios, Ratios....................Where Art Thou RATIOS!!!

By
Mortgage and Lending with George Souto NMLS #65149 FHA, CHFA, VA Mortgages NMLS #65149

OK, OK I am on a Shakespeare kick, but it goes to the heart of what I am writing about.  It is not unusual to hear the people in my office who have been involved in underwriting for years to say “that is not how it was in the old world”.  What they mean by that is how underwriting was done before “Automated Underwriting Systems” like Fannie Mae’s (DU) and Freddy Mac’s (LP).  These Automated Underwriting Systems have turned the way underwriting is done upside down.  I am not going to go over all the things that have brought this about but I will cover three of them.

 First, very few loans are manually underwritten any more.  Once a Loan Officer submits a loan through DU or LP and gets an Approved/Eligible or Accept, the loan is basically approved.  At that point all the Underwriter needs to do is verify the information on the application, make sure that every thing on the Automated Systems Feedback was followed, and that the house appraised.  If all this checks out the loan is done and a Loan Commitment is issued. Underwriters had a real hard time with this new concept, because they were used to certain documentation being provided, that the Automated Systems don't always ask for. Example, DU and LP some times does not require that an appraisal be done on purchase or refi’s, they waive it. These changes were not well received in their world.  A lot of Underwriters would still request the documentations, this created a little bit of turmoil between them and the Loan Officers, because now the Automated Underwriting Systems Feedback controlled a major part of the Loan.

The second major change is the “Ratios”.  This leads to the title of my blog.  Where are the ratios, they are through the roof.  Underwriters used to follow a hard set rule that ratios would be no more than 28/36. Today if a Borrower has good credit scores, I said good, not great, but good credit scores I can get a conventional loan approved with a 65% total debt ratio.  That is not just a little jump, it is a huge jump in the ratios.  Even government loans like FHA can get approved with 41/50 ratio.  This blew Underwriters minds, and it was very hard for them to accept this.

The third major change is the ability of a Loan Officer to give a Pre-Approval Letter with a very high degree of certainty that the Realtor has a qualified Borrower.  I do not give any Pre-Approval Letters without first taking a full application, once I do that I run the information through DU or LP, if I get a response with an Approved/Eligible or Accept, I have a qualified Borrower if he or she has told me the truth.

It looks like “Automated Underwriting” is here to stay, and a computer has a major say in whether a loan gets approved or not. There are other changes that “Automated Underwriting” has brought about in the Lending Industries, but these standout the most to me.  I hope it helps some of the Realtors on here understand the procedure today a little bit better, especially the ones that can remember the days of the 28/36 “Ratios”

 

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Info about the author:

George Souto is a Loan Officer who can assist you with all your FHA, CHFA, and Conventional mortgage needs in Connecticut. George resides in Middlesex County which includes Middletown, Middlefield, Durham, Cromwell, Portland, Higganum, Haddam, East Haddam, Chester, Deep River, and Essex. George can be contacted at (860) 573-1308 or gsouto@mccuemortgage.com

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George Souto
NMLS# 65149

C (860) 573-1308
CALL 7 Days/Wk
Fax (860) 760-6891

Email Me
About Me
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I am a Mortgage Loan Officer who can assist you with all your mortgage & refinancing needs in
CT, and RI

I can assist you with your Conventional,
FHA, CHFA, VA, USDA, & 203K loan programs.

I reside in Middlesex County which includes Middletown, Middlefield, Durham, Cromwell, Portland, Haddam. E. Haddam, Higganum, Chester, Essex, Deep River.

 

Comments(28)

Jeff Belonger
Social Media - Infinity Home Mortgage Company, Inc - Cherry Hill, NJ
The FHA Expert - FHA Loans - FHA mortgages - USDA loans - VA Loans
George.... curious....not busting on you, but you make it sound so easy with good credit scores. What loans are you getting done with 65% ratios?  With my experience, there is more to it than this. Mega assets would be one of them. Really no payment shock. ...and so much more. Again... not saying that it can't be done, but I think more facts are needed to give reason to others why and how this can be done.... and not just on a good credit score. And define good....  650?
Oct 25, 2006 04:32 PM
George Souto
George Souto NMLS #65149 FHA, CHFA, VA Mortgages - Middletown, CT
Your Connecticut Mortgage Expert

Good questions Jeff, no offence taken.  On my regular conventional 30 year fixed with credit scores  650 or higher with a clean history no charge offs, collections or bankruptcies I have gotten an Approved/Eligible with 65% back ratio from DU with 5% down and maybe one to two months reserves.  My Treasury ARM 660 or higher same thing good history, no charge offs, collections, or bankruptcies, with 10% down, I have gotten Approved/Eligible with 65% back ratio from DU.  Hope you are ready for this one, no money down 100% financing, only $500 out of pocket towards closing costs, the rest can come from the seller, 650 or higher, again good history, no charge offs, collections, or bankruptcies 65% back ratio with very little in reserves. But if it does ask for reserves, 3 months max on a single family. Interest rates in the mid 7's  right now on the last one.

I get these feed backs all the time.  I think it is crazy for a borrower to do this, and I warn them, but if DU gives me an Approved/Eligible then it is Fannie Mae that is on the hook for it.

I usually will asked them if they like eating, and being able to drive their car, because there isn't going to be much left over for that.  But some don't want to hear it, they just want the house.  I warn them and give them as much info as possible, but in the end it is their decision.

Oct 26, 2006 05:10 AM
Jeff Belonger
Social Media - Infinity Home Mortgage Company, Inc - Cherry Hill, NJ
The FHA Expert - FHA Loans - FHA mortgages - USDA loans - VA Loans

George... I know DU has changed... but most of my buyers are the clean 620 and above and have the income or money..... or they are subprime. I do have the middle people that I do as Alt-A deals..... but in regards to ratios... if my clients have high ratios, it's usually the 70% or higher... lol  I have gotten FHA ratios to 63% before.

 Anyhow...thanks

Oct 26, 2006 06:06 AM
George Souto
George Souto NMLS #65149 FHA, CHFA, VA Mortgages - Middletown, CT
Your Connecticut Mortgage Expert

Jeff how in the world are you getting 63% on an FHA, I can't get higher that 50% on FHA, you must have a Genie in that computer...LOL

Oct 26, 2006 06:16 AM
George Souto
George Souto NMLS #65149 FHA, CHFA, VA Mortgages - Middletown, CT
Your Connecticut Mortgage Expert
Blanca, thank your for making this a featured post in your Group "Wat is New Loan in Products"
Dec 10, 2006 04:02 PM
Brian Brass
Brian Brass - Guaranteed Rate - Troy, MI

WHAT ABOUT SEEMINGLY LOW DTI RATIOS...NOT APPROVED? 

I too have enjoyed the files with high ratios and relatively low assets.
But recently I've seen a swing in the other direction as well...

DU Level II for the following:
- 732 Fico
- 25% DTI
- 30 Months Reserves
- Rate/Term Refinance
- 30-Yr Fixed Program
- No Derogatory Credit
- 5 Years of Mortgage history
- Reducing payment $75/month

Only explanation was that current mortgage was only reporting 2 months.
Borrower puchased in 7/06 and was looking to do rate/term refinance.

I've had several files that fit this "short mortgage history reporting" profile.
Fortunately we were able to place them into other NON-DU programs.

Interested to know if others are experiencing this as well...

 

 

 

 

 

Dec 18, 2006 03:56 AM
George Souto
George Souto NMLS #65149 FHA, CHFA, VA Mortgages - Middletown, CT
Your Connecticut Mortgage Expert
Brian, I have found that if I am over 70 LTV on a Refi, that DU is usually looking for 36 months Reserves no matter the FICO or DTI.  It does not make since some times but that is what I have been getting.
Dec 18, 2006 08:53 AM
Eddy Martinez
Nationwide Funding Group - Highland Park, CA

George hows it going ?

I do the same thing that you do, i dont give out preapproval letters. I have the prospective client give me all of their income documentation up front. I then have the staff underwriter look at it then i tell the client if they can obtain financing or if the purchase is within their affordability factor (DTI) .

Eddy

Feb 06, 2007 06:15 AM
George Souto
George Souto NMLS #65149 FHA, CHFA, VA Mortgages - Middletown, CT
Your Connecticut Mortgage Expert
Eddy, you can't go wrong doing that.  I am in contact with my underwriter all the time, the way I look at it we are a team so I keep her involved in everything.
Feb 06, 2007 06:25 AM
Ron Withers ----Retired Mortgage Professional
Kissimmee, FL

George,

Great informational post for those who may not know about or understand Automated Underwriting Systems  (AUS). I think that once underwriters got accustomed to AUS they really have come to like it. It takes a big monkey off their back particularily when it comes to one of those "Tweener Loans" and granting exceptions that are outside the box.

Me....I have come to love it as it is a major resource or tool to work the scenarios and what ifs to make a deal come together. It's great to be able to issue a pre-approval with an abundance of confidence. As a matter of fact, I had to back off from pre-judging a lot of loans. AUS have blown my mind on favorable findings many times.

P.S. I got one approved recently-100% financing, 64% back end ratio and no reserves.

Feb 06, 2007 08:34 AM
George Souto
George Souto NMLS #65149 FHA, CHFA, VA Mortgages - Middletown, CT
Your Connecticut Mortgage Expert
Ron, I have to agree (AUS) has made life a lot easier, but at the same time allowed for some risky loans.  I find that if the credit is good, that I can get an Approved/Eligible on 100% financing as long as I keep the back ratio under 65%.  I try to inform the borrower about the dangers of that, but in the end it is their decision, I just make sure that they make that decision with all the facts.
Feb 06, 2007 01:48 PM
Ron Withers ----Retired Mortgage Professional
Kissimmee, FL

George,

I agree and this is a part of what I preach as part if my Three Rules for my clients.

Feb 06, 2007 10:16 PM
Eddy Martinez
Nationwide Funding Group - Highland Park, CA

George we have that advantage over others that our underwriters and staff are in house. This teamwork helps close loan faster!!!

Eddy

Feb 08, 2007 08:46 AM
George Souto
George Souto NMLS #65149 FHA, CHFA, VA Mortgages - Middletown, CT
Your Connecticut Mortgage Expert
Eddy, you are right having the underwriter, & closer right there is a big help.
Feb 08, 2007 10:08 AM
Delete Profile Delete Profile
Delete My Active Rain Profile - Riverside, CA
And you can't forget the loans out there that are truly "No Ratio" loans.  Up until just months ago with a 620 FICO score you could get 100% financing without even putting income down on the app...provided there was only 1 mortgage late in the last 2 years.  Now you need 10% down to purchase or refi "No Ratio" but that's a great product for those people who just don't have the income to qualify. 
Jul 18, 2007 06:01 AM
George Souto
George Souto NMLS #65149 FHA, CHFA, VA Mortgages - Middletown, CT
Your Connecticut Mortgage Expert
Christopher you are right, a No Ratio Loan with only a 620 FICO and 10% down is a great deal any time you can get it.
Jul 18, 2007 06:15 PM
James R. Gill
Manhattan Beach, CA
Thank goodness the ratios have loosened!  With the new IO qualifying rules, we were sunk.
Oct 03, 2007 03:11 PM
George Souto
George Souto NMLS #65149 FHA, CHFA, VA Mortgages - Middletown, CT
Your Connecticut Mortgage Expert

James, with all the changes in the Industry lately they have began to tighten up a little again, but they are still a lot different than the days of manual underwriting.  Many more people can now purchase homes because of automated underwriting and the higher ratio's, but sometimes they allow people to get a little over their heads.

Thank you for stopping by and commenting. 

Oct 03, 2007 11:54 PM
Gary Woltal
Keller Williams Realty - Flower Mound, TX
Assoc. Broker Realtor SFR Dallas Ft. Worth
A 65% debt ratio is staggering! Whatever happened to the days of 33, 36, or 39% debt ratios? Wow!
Oct 20, 2007 07:03 AM
George Souto
George Souto NMLS #65149 FHA, CHFA, VA Mortgages - Middletown, CT
Your Connecticut Mortgage Expert

Gary, that all changed, and I am not sure that it was completely for the better.

Senaid, you are right about the need to still know all those things.  We also need to know why sometimes you get an Approved/Eligible and sometimes you don't when the two loans are almost the same.  You need to know what to look for so that you can see if the Borrower is able to make the necessary adjustments.  AU is not going to tell you what to do, that knowledge only comes with training and knowledge.  The human factor as you said is still a major part of the Mortgage Industry. 

Oct 20, 2007 01:55 PM