Don't Let Underwriting Overlays Hijack your Mortgage Approval

By
Mortgage and Lending with Keystone Home Finance - NMLS#834342 - Conventional - FHA - VA -USDA - Jumbo Programs - Direct Phone 412-726-1654 NMLS# 137243
http://activerain.com/droplet/4whZ

 

All too often these days, we hear about mortgage applications being denied due to tight underwriting guidelines.  Often is not the standard underwriting guidelines of FHA, USDA, VA, Fannie Mae or Freddie Mac that is tripping up these loan files but the restrictions of the lender itself. 

Sometimes it may seem like these conditions pop up out of nowhere but they do not.  Underwriters work for the lender and they are paid to underwrite each file according to the written underwriting manual published by that lender.  Even though sometimes it seems like they just make this stuff up as they go along, they don't.  Each lender publishes these underwriting manuals for loan officers to check as well, it is really simply just a matter of reading them.   Potential snags in the underwriting process can typically be avoided by selecting a loan officer who has taken the time to familiarize themselves with the individual requirements of the lenders. 

 

So who really makes  up these underwriting guidelines any way?

When it comes to underwriting guidelines, FHA, USDA, VA, Fannie Mae and Freddie Mac all have their own set of standard guidelines that must be met in order for a mortgage to be either guaranteed, insured or sold to them.  A lot of these guidelines overlap each other but within each program there are guidelines that make that particular program unique.  Requirements between the programs often differ in regards to downpayment, credit score, debt to income ratios and other factors. 

Requirements within the same program can also differ by individual lender.  When a lender has its own guidelines on top of the standard underwriting guidelines of FHA, USDA, VA, Fannie or Freddie Mac, it is known as an underwriting overlay.  These overlays can mean the difference between mortgage approval and denial. 

 

Why would a lender have its own underwring overlay anyway?

Risk or perceived risk that is.  Underwriting overlays have always been around to some degree but in the last few years with a tight secondary mortgage market, turbulent economy and the closing of many banks, there has been low appetitie for risk in the lending world.  This translates to tighter lending guidelines.  Just like individual people have varying appetities for risk, the same applies to individual lenders.  For example, a particular lender may not be willing to lend on a lower credit score even though FHA allows for it.  Why?  If the loan defaults the lender still may absorb a loss even with the partial backing of the government program. 

 

What are some common underwriting overlays out there?

Credit scores, loan amounts and debt to income ratios are common overlays.  Overlays have also been seen in regards to VA cash out restrictions, owning more than one FHA/VA/USDA property, and total number of financed properties. 

Just recently, I had to bypass one of these common underwriting overlays.  I had a borrower purchasing a home who was job transferring to another part of the state.  The borrower wanted to use USDA financing to take advantage of the 100% financing option.  The borrower wished to fix up their current home before readying it for sale, but they needed to move into the new home right away.  This would leave them in a position of owning more than one home for a period of time.  USDA actually does allow a borrower to own more than one home at a time as long as the new home is more than 50 miles from the home to be purchased and the unsold home is not a home currently financed by the USDA.  Even though the USDA allows for this scenario, the majority of USDA lenders do not.  This is their own underwriting overlay on top of the USDA guidelines.  I had access to one USDA lender that did not have this common overlay and the loan closed and funded as scheduled.

 

What is the best way to prevent one of these overlays from ruining my application?

At time of application, all issues that could possibly effect your loan application should be disclosed.  This gives the loan officer the best chance of avoiding an overlay before the file reaches the underwriter's desk.  Since different lenders have differing overlays, a knowledgeable loan officer can select the right lender to match your situation before these overlays hijack your lending transaction. 

 

 

  

Posted by

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Keith Landis is a Licensed Mortgage Loan Officer covering all of Pennsylvania.  He can be reached toll free at 877 334 6094 or on his cell at 412 726 1654 or by email at klandis@keystonehomefinance.com 

NMLS # 137243

further information can also be found here....

 

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Re-Blogged 2 times:

Re-Blogged By Re-Blogged At
  1. Victoria Frieberg 10/12/2011 12:52 AM
  2. Janice Roosevelt 10/26/2011 11:02 AM
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underwriting overlays
mortgage underwriting guidelines

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Rainmaker
52,132
Victoria Frieberg
Rush Point Realty LLC, Victoria Frieberg, broker - Rush City, MN
Realtor, Broker, Rush Point Realty LLC

Nice job!  I am reblogging and recommending.  It is great when we are armed with enough knowledge to help our buyers get to the right financing avenue from the beginning.  When you have a trusted loan officer that can look at a file and let you know if they can get it done, or can identify exactly what may need to be done for a variance..and if it is even possible, that lo is golden. 

Oct 12, 2011 12:56 AM #1
Rainer
31,070
John Kemmerling
Pittsburgh, PA
Nice article. Thanks for posting it.
Oct 12, 2011 02:47 AM #2
Rainer
40,451
Marcy Steiner
Pittsburgh, PA
You are right about the underwriting guidelines. Lenders provide these. It is hard to believe that a lo wouldn't read these.
Oct 12, 2011 03:00 AM #3
Rainmaker
600,922
Donne Knudsen
Los Angeles & Ventura Counties in CA - Simi Valley, CA
CalState Realty Services

Keith - AMEN!!!  And this is the difference between a good MLO and one who is just an order taker.  A good MLO will not only read the overlays before taking an app but will know them by heart for their fave lenders.  Sometimes, this is a challenge for many borrowers to understand because they will read on line that FHA or Fannie or Freddie will allow something but then I have to explain to them that there isn't a lender in town that will fund a loan like that.

On another note, this has also enabled me to save a lot of transactions for borrowers who were otherwise turned down by another lender.  Typically, these were transactions where some unlicensed bank rep who didn't even know their own overlays took an app for a borrower who later got denied in escrow.  As a mortgage broker, I was able to find them a local lending source who didn't have the same overlay as the big, national, retail bank.

Oct 12, 2011 05:37 AM #4
Rainmaker
646,185
Keith Landis
Keystone Home Finance - NMLS#834342 - Conventional - FHA - VA -USDA - Jumbo Programs - Direct Phone 412-726-1654 - Pittsburgh, PA
Pennsylvania - "Your Pennsylvania Mortgage Source"

Thanks Donne, I have found non-big bank lenders to have less overlays as well

Oct 13, 2011 12:06 AM #5
Anonymous
Lesley

I have now paid for 4 appraisals because I can pre-qualify for loans easily but have on every occasion had problems post-prequalification.   My loan parameters/credentials are stellar, ltv ratio less than 60%, excellent credit, DTI well below the magic 40%.    I have become so experienced now that I find myself interviewing the loan salesperson not the other way around.   Do I have any recourse in situations where the lender/salesperson failed to disclose their overlay prior to making me pay for an appraisal even when I have asked them very detailed questions.  As you can imagine it's getting OLD in a hurry and I would like to get my appraisal money back.

Nov 16, 2011 03:04 AM #6
Rainmaker
646,185
Keith Landis
Keystone Home Finance - NMLS#834342 - Conventional - FHA - VA -USDA - Jumbo Programs - Direct Phone 412-726-1654 - Pittsburgh, PA
Pennsylvania - "Your Pennsylvania Mortgage Source"

Lesley

Feel free to call me at my office 412 567 6560 to review the Underwriting Overlays that are preventing your mortgage approval

Nov 16, 2011 03:30 AM #7
Anonymous
Julia

I'm so sick of trying to get a mortgage. I will probably just rent. It's stressful I'm getting old and there are too many rules. It makes me sick to my stomach and in the end I'm going to die anyway. If you own anything after death the ones you leave behind will have the tax collectors holding out their hands. I'm sick of the whole mess. I was born with nothing and most likely will ride out the same way. Did I miss anything?

Jan 08, 2018 06:36 PM #8
Rainmaker
646,185
Keith Landis
Keystone Home Finance - NMLS#834342 - Conventional - FHA - VA -USDA - Jumbo Programs - Direct Phone 412-726-1654 - Pittsburgh, PA
Pennsylvania - "Your Pennsylvania Mortgage Source"

Julia, give me a call to discuss.

Jan 08, 2018 07:13 PM #9
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Rainmaker
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Keith Landis

Pennsylvania - "Your Pennsylvania Mortgage Source"
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