Mortgage and Lending |
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Mark Pentak | ||
location_on Venice, FL | ||
web Mark Pentak's (mpent) Blog |
An underwriter is a person hired by a Lender to make sure the loan meets the guidelines of the investor or lender. They really have a tough job because a lot rides on them and they are responsible for bad loans that get approved. VA underwriters will take a file and look over it very carefully and make sure that the originating loan officer packaged the file correctly and make sure nothing is missing or fraudulent. Underwriters must understand VA loan qualifications and mortgage approval based on the Veterans credit history, income, debt, down payment, equity and compensating factors. They issue approvals, clear to closes and denials. They are basically the last line in the home buying or refinancing process. If a Veteran can make it past an underwriter then its usually clear sailing until closing.
VA GUIDELINES
Once the loan officer has established the value of the home, obtained title work, income documentation and VA loan disclosures, the file is now ready for Underwriting. The loan gets sent to the Underwriting and they will review everything the LO put together. They have most of the analytical tasks. They will follow all the guidelines established by the VA for approval. They looks most at the 3 C's. Credit, Capacity and Collateral. Credit is obviously the documentation used to determine the Veterans ability to make payments on time. Capacity is the Veterans income, debt, reserves and job time. Does the Veteran have the income capacity to make the payments. Collateral is the home and its value. If you can pass the 3 C's then an approval will usually be issued.
Once the file comes out of Underwriting there are almost every time conditions. This is still an approval, but the LO will have to meet additional criteria and sometimes provide additional documentation from the Veteran to get a final approval. Once the underwriter is satisfied and all the VA conditions are met then you will be to close your loan. An important thing to remember is that the Underwriter will also issue funding requirements. This means after closing there might be additional work that needs to be done in order to have funds dispersed.
The whole process of Underwriting can take up to 60 days. I have personally seen it take this long because of too much volume and not enough underwriters. Usually though it takes about 1 to 2 weeks. Don't look at underwriters as someone who doesn't want your loan, in fact its just the opposite. They want to have the work and approve files. They plan an important role in the VA mortgage industry and will continue to do so.
Application The first step in the official loan approval process; this form is used to record important information about the potential borrower necessary to the underwriting process.
Appraisal A document that gives an estimate of a property's fair market value; an appraisal is generally required by a lender before loan approval to ensure that the mortgage loan amount is not more than the value of the property.
Appraisal. A professional opinion of the market value of a property.
Appreciation. An increase in the value of a property due to changes in market conditions or other causes.
ARM Adjustable Rate Mortgage; a mortgage loan subject to changes in interest rates; when rates change, ARM monthly payments increase or decrease at intervals determined by the lender; the Change in monthly -payment amount, however, is usually subject to a Cap.
Assessed value. The valuation placed upon property by a public tax assessor for purposes of taxation.
Assessor: A government official who is responsible for determining the value of a property for the purpose of taxation.
Assumable mortgage. A mortgage that can be taken over ("assumed') by the buyer when a home is sold.
Assumption. The transfer of the seller's existing mortgage to the buyer.
BAD CREDIT REFI (REFINANCE): Lenders may offer bad credit refinance packages to help owners pay off debts and restructure mortgages to improve credit. Other programs assist homeowners in fighting foreclosures by providing interest-only solutions, debt-consolidation plans, and extended-term loans.
Balloon Mortgage: A mortgage that typically offers low rates for an initial period of time (usually 5, 7, or 10) years; after that time period elapses, the balance is due or is refinanced by the borrower.
BC & D Lender or Loan term BC & D is a rating of the loan. Similar to Moody's Rating scale for Bonds as AAA, AA, A, etc. Generally, loans termed as A paper are for borrorwers with very good credit. BC & D lenders specialty in BC & D loans. For the most part, on our web site, we refer to BC& D as "problem or troubled" credit rather than using these letters.
Bankruptcy: A federal law Whereby a person's assets are turned over to a trustee and used to pay off outstanding debts; this usually occurs when someone owes more than they have the ability to repay.
Binder. A preliminary agreement, secured by the payment of earnest money, under which a buyer offers to purchase real estate.
Borrower: A person who has been approved to receive a loan and is then obligated to repay it and any additional fees according to the loan terms.
Building code: Based on agreed upon safety standards within a specific area, a building code is a regulation that determines the design, construction, and materials used in building.
Budget:A detailed record of all income earned and spent during a specific period of time.
Buydown:process of paying additional points on the loan to reduce the monthly mortgage. There are typically two specific types: a Permanent Buydown, and a Temporary Buydown. In a Permanent Buydown, a sufficient amount of interest is prepaid to lower the rate permanently. In a Temporary Buydown, only a sufficient interest is paid to lower the payment for the first three years. The reason to Temporarily Buydown a loan is to lower the current payments thereby more easily qualifying for the loan. This usually makes sense because income will usually continue to increase as the interest rate does. The most common Temporary Buydown is called 3-2-1, meaning three percent lower the first year, two percent lower the second year, and one percent lower the third year.
Cap. A provision of an ARM limiting how much the interest rate or mortgage payments may increase or decrease.
Cash reserve. A requirement of some lenders that buyers have sufficient cash remaining after closing to make the first two monthly mortgage payments.
Clear title. A title that is free of liens or legal questions as to ownership of property.
Closing. A meeting at which a sale of a property is finalized by the buyer signing the mortgage documents and paying closing costs. Also called "settlement."
Closing costs. Expenses (over and above the price of the property) incurred by buyers and sellers in transferring ownership of a property. Also called "settlement costs."
Commitment letter. A formal offer by a lender stating the terms under which it agrees to lend money to a home buyer.
Condominium. A form of property ownership in which the homeowner holds title to an individual dwelling unit, an undivided interest in common areas of a multi-unit project, and sometimes the exclusive use of certain limited common areas.
Contingency. A condition that must be met before
Conventional mortgage. Any mortgage that is not insured or guaranteed by the federal government.
Convertible ARM. An adjustable-rate mortgage that can be converted to a fixed-rate mortgage under specified conditions.
Cooperative. A type of multiple ownership in which the residents of a multi-unit housing complex own shares in the corporation that owns the property, giving each resident the right to occupy a specific apartment or unit.
Covenant. A clause in a mortgage that obligates or restricts the borrower and that, if violated, can result in foreclosure.
Credit report. A report of an individual's credit history prepared by a credit bureau and used by a lender in determining a loan applicant's creditworthiness.
Deed. The legal document conveying title to a property.
Deed of trust. The document used in some states instead of a mortgage; title is conveyed to a trustee rather than to the borrower.
Default. The failure to make a mortgage payment on a timely basis or to otherwise comply with other requirements of a mortgage.
Delinquency. A loan in which a payment is overdue but not yet in default.
Deposit. See Earnest money.
Depreciation. A decline in the value of property; the opposite of "appreciation."
Discount points. See Points.
Down payment. The part of the purchase price which the buyer pays in cash and does not finance with a mortgage.
Due-on-sale clause. A provision in a mortgage allowing the lender to demand repayment in full if the borrower sells the property securing the mortgage.
Earnest money: money put down by a potential buyer to show that he or she is serious about purchasing the home; it becomes part of the down payment if the offer is accepted, is returned if the offer is rejected, or is forfeited if the buyer pulls out of the deal.
EEM: Energy Efficient Mortgage; an FHA program that helps homebuyers save money on utility bills by enabling them to finance the cost of adding energy efficiency features to a new or existing home as part of the home purchase
Equity: an owner's financial interest in a property; calculated by subtracting the amount still owed on the mortgage loon(s)from the fair market value of the property.
Escrow account: a separate account into which the lender puts a portion of each monthly mortgage payment; an escrow account provides the funds needed for such expenses as property taxes, homeowners insurance, mortgage insurance, etc.
Fair Housing Act: A law that prohibits discrimination in all facets of the homebuying process on the basis of race, color, national origin, religion, sex, familial status, or disability.
Fair market value: The hypothetical price that a willing buyer and seller will agree upon when they are acting freely, carefully, and with complete knowledge of the situation.
Fannie Mae: Federal National Mortgage Association (FNMA); a federally-chartered enterprise owned by private stockholders that purchases residential mortgages and converts them into securities for sale to investors; by purchasing mortgages, Fannie Mae supplies funds that lenders may loan to potential homebuyers.
With an FHA mortgage or mortgage refinance, underwriting guidelines are less strict than conventional mortgage loans. When a lender reviews an application for an FHA insured loan they will be more flexible when considering household income and debt-to-income ratios. However, an applicant must meet certain requirements that FHA has established in order to qualify. The following are general qualification guidelines, according to HUD:
The borrower must meet standard FHA credit qualifications. The borrower must have a valid social security number, lawful residency in the United States, and be of legal age to sign on a mortgage. The borrower is eligible for approximately 96.5% financing. The borrower is able to finance the upfront mortgage insurance premium into the mortgage. The borrower will also be responsible for paying an annual premium. Eligible properties are one-to-four unit structures. FHA mortgage programs do not typically have maximum income limits, however you must have sufficient income to qualify for mortgage payments and other debts. Verification of income, assets, liabilities, and credit history for all borrowers is required.FHA Loans Require Low Down Payment
The FHA's guarantee gives borrowers who have less than perfect credit a chance to obtain low interest rate loans. FHA loans also have minimal down payment requirements. A qualifying borrower can finance 97% of the cost of the home, even including the closing costs in the mortgage.
FHA Loan Income Requirements
FHA borrowers must demonstrate an ability to pay the mortgage that they apply for. The FHA requirements protect the borrower from getting a loan that is beyond the borrower's means. The income requirements are looked at in two ways. The first is to compare the borrower's gross qualifying income to the new principal and interest mortgage payment, an escrowed portion to cover the property taxes, homeowner's insurance, the mortgage insurance premium, etc. To qualify for the loan, the percentage of these costs cannot exceed 29% of the gross income.
The second ratio compares the borrower's gross income to not only the costs listed above, but also looks at other monthly payments the borrower has, such as a car payment, a student loan payment, and the monthly minimum payments required by credit card accounts. In order to qualify for the FHA program, these costs cannot exceed 41% of the gross income.
FHA Loans and Credit
Having a qualifying income does not mean that a borrower will qualify for the FHA program. Credit history is also a determining factor. Regarding a borrower's credit, FHA loans have looser standards than conventional loans. One great feature of FHA loans is that they do not require a high credit score. Normally, a FICO credit score of 580 is the minimum acceptable score. An extensive credit history is also not required. FHA loans generally do require a borrower to have two active lines of credit. The FHA even makes exceptions to that rule, if the borrower can demonstrate a solid payment history on payments for housing rental, auto insurance, and utilities.
FHA Loans and Delinquencies
A borrower can be disqualified from an FHA loan due to late payments on a previous mortgage within the last 12 months. If there is only one late mortgage payment in the past year and the borrower can provide a satisfactory explanation, the loan may be approved.
The presence of 30-day late payments to other creditors does not disqualify a borrower. The risk of not qualifying increases when a 60-day late payment appears. The FHA is looking for a pattern of responsible bill paying. If a responsible pattern has been established, an earlier period of serious delinquency could be ignored.
NSF checks are not likely to affect qualification. They rarely appear on a credit report and are not likely to be a topic of conversation in the FHA application process.
FHA Loans and Bankruptcy
Regarding a Chapter 7 bankruptcy, the bankruptcy must have been discharged for 24 months, before an FHA loan will be approved. Please be aware that the discharge date is not the filing date. The discharge takes place after the bankruptcy court ordered all debts included in the Chapter 7 bankruptcy to be liquidated and then issued a notice of discharge.
A borrower can qualify for an FHA loan, even in the middle of a Chapter 13 bankruptcy! The payments to the bankruptcy trustee must be made as agreed for a one year period, the bankruptcy trustee must approve the loan payment, and the borrower must demonstrate job stability.
FHA Loans and Foreclosure
FHA loans generally require that the borrower not have a foreclosure or been issued a deed-in-lieu of foreclosure for the past 36 months. This is not a hard and fast rule. If a borrower can demonstrate a good payment history after the foreclosure and a reasonable explanation of why the foreclosure took place, the loan could be approved.
FHA Loans and Collection Accounts or Judgments
Minor collection accounts do not need to be paid in full in order to qualify for the loan. Judgments, on the other hand, must be paid in full.
FHA Loans and Federal Debt
Any borrower with a federal tax lien for delinquent federal tax debt or who has delinquent federal student loans will not qualify for an FHA loan.
Non-Purchasing Spouse
A married borrower who wishes to purchase a home without his/her spouse, still must include the income and debts of the spouse on the application if the borrower resides in a community property state. A non-purchasing spouse may be required to sign a document acknowledging the transaction and relinquishing his/her rights to the property.
FHA Loan Appraisal Requirements
FHA loans require an appraisal of the property's value to be made by an FHA approved licensed appraiser. An FHA appraisal is very thorough. It checks for the soundness of the structure as well as for health and safety issues. It is important for a borrower to keep in mind, however, that the FHA's acceptance of the appraisal does not protect the borrower; the FHA is not guaranteeing the condition of the property. If the home has a problem after the purchase, the borrower is solely responsible. This means that the borrower is well advised to pay for a separate home inspection, which is not the same as an appraisal.
FHA: Federal Housing Administration; established in 1934 to advance homeownership opportunities for all Americans; assists homebuyers by providing mortgage insurance to lenders to cover most losses that may occur when a borrower defaults; this encourages lenders to make loans to borrowers who might not qualify for conventional mortgages.
Fixed-rate mortgage: A mortgage with payments that remain the same throughout the life of the loan because the interest rate and other terms are fixed and do not change.
Flood insurance: Insurance that protects homeowners against losses from a flood; if a home is located in a flood plain, the lender will require flood insurance before approving a loan.
Foreclosure: A legal process in which mortgaged property is sold to pay the loan of the defaulting borrower.
Freddie Mac: Federal Home Loan Mortgage Corporation (FHLM); a federally-chartered corporation that purchases residential mortgages, securitizes them, and sells them to investors; this provides lenders With funds for new homebuyers.
Ginnie Mae: Government National Mortgage Association (GNMA); Dovernment-owned corporation overseen by the U.S. Department of Housing and Urban Development, Ginnie Mae pools FHA-insured and VA-guaranteed loans to back securities for private investment; as With Fannie Mae and Freddie Mac, the investment income provides funding that may then be lent to eligible borrowers by lenders.
Good faith estimate: An estimate of all closing fees including pre-paid and escrow items as well as lender charges; must be given to the borrower within three days after submission of a loan application.
H
Hazard insurance. Insurance coverage that compensates for physical damage to a property from fire, wind, vandalism, or other hazards.
Helping Lenders Navigate the Mortgage Underwriting Process