As we begin 2011, underwriting guidelines remain the tightest that many in the mortgage and real estate industries have seen in recent years. Today's rules/requirements echo those of the pre-2000 era. Given that a great number of today's players in the real estate industry have been in the industry less than 10 years, many simply cannot understand these changes. For those who have been in the business longer, many of those have forgotten the old days when today's guidelines were common practice. Every still has the 2005-2006 era stuck in their head. That is now what is know as HISTORY. It's now time to move on with the reality of the present.
This brings to us to the issues that many of us face today. Some of it comes down to a basic lack of understanding about what really goes on in the mortgage industry. Most of the requirements of today incorrectly get blamed on the underwriter. I am sure there are a few underwriters who would like to wield that must power. Sadly, for them, they don't. Underwriting guidelines are, for the most part, standardized and set by the Secondary Mortgage Market.
For conventional mortgages, those underwriting guidelines are set by the agencies themselves, Fannie Mae and Freddie Mac. Both Fannie and Freddie will periodically update and revise there guidelines to better meet the ever changing market. HUD mandates the requirements for FH and VA mortgages.
What is important to note is that while each of agencies do set the minimum standards, it is now common practice for each lender to add their own guideline overlay. For more on overlay, check out What Is An Underwriting Guideline Overlay?.
Many real estate agent and borrowers who complain about unrealistic underwriting requirements really just do not understand the huge risk that a mortgagecompany take on with each and every mortgage loan approved and closed. The default of one mortgage can cost a company tens of thousands to hundreds of thousands of dollars. Too many of those can easily bankrupt a company.
I would imagine is the real estate companies started to have to share in the costs of the defaults, they would not longer complain about anything being too strict. Imagine if you own your own real estate office, XYZ Realty You have the risk of the loan if it defaults. Your agent, Sally Smith, sells John and Jane Miller a home for $200,000 and they take out a $190,000 mortgage. After 11 months, John loses his job and they default on the mortgage. That now leaves XYZ Realty on the hook. How many defaults do you think it would take to force you into bankruptcy and close your company? Not very many I would bet.
With the sheer number of mortgage companies and banks that have been forced to close since 2007, agents do need to be more understanding and knowledgeable about the current market conditions for mortgages. Current mortgage companies want to only make loans which will enable them to continue to stay in business. Without make viable and sale-able loans, a mortgage company cannot continue in business.
Many real estate agents complained their way through underwriting in 2008, 2009, and 2010. Let's start 2011 with a brand new and more positive attitude. Learn more about the requirements of the mortgage industry and make your closings more stress free.