The media has it all wrong – securing mortgage approval and satisfying credit
underwriting guidelines are not the difficulties plaguing mortgage consumers.
It’s in meeting the rigorous documentation requirements that most people fall
flat. The good news is, the fix is simple. Just scan, photocopy, fax, and
deliver every aspect of your financial life. Then, shortly before closing, check
Mortgage consumers who enter the mortgage approval process ready to battle their chosen
mortgage lender will come out with a nightmare story to tell. As the process,
requirements, and guidelines are the same for everybody, your mindset is the
game-changer. Accepting the redundant documentation necessary for lender
approval will make everyone’s life easier.
When I was a kid, my father occasionally issued directives that I naturally thought
were superfluous, and when asked why I needed to do whatever it was he wanted me
to do, his answer was often: “Because I said so.” This never seemed to address
my query but always left me without a retort, and I would usually comply. This
is exactly what consumers should do during the mortgage approval process. When
your lender requests what seems to be over-documentation and you wonder why you
need it, accept the simple edict – “because I said so.” You will find the
mortgage approval process much less frustrating.
So, what’s the perfect loan? Well, it’s one that (a) pays back the lender and (b)
pays back the lender on time. Underwriting the perfect loan is not the goal that
mortgage lenders aspire to today.
The real goal is the perfect loan file.
Mortgage lenders have suffered staggering losses and gone out of business because of the
dreaded loan repurchase. As mortgage delinquencies increased, FannieMae and
FreddieMac began to audit mortgage loans they had purchased and discovered
substandard and fraudulent underwriting practices that violated representations
and warranties made, stating these were high quality loans. Fannie and Freddie
began forcing the originating lenders of these “bad” loans to buy them back. So
a small correspondent mortgage lender is forced to buy back a single mortgage
loan in the amount of $250,000. This becomes a $250,000 loss to a small mortgage
business for a single loan, because it will never be repaid.
It doesn’t take many of these bad loan buybacks to close the doors on many small
mortgage operations. The lending houses suffered billions of dollars of losses
repurchasing loans from Fannie and Freddie, and began to do the same thing for
loans they had purchased from smaller originators.
The small and medium sized mortgage originators that survived created underwriting
guidelines and procedures to eliminate the threat of future loan repurchase
losses. The answer? The perfect loan file.
It’s no longer necessary to have excellent credit, a big down payment and stable
employment with income sufficient to support your debt service to guarantee your
loan approval. However, you must have a borrower profile that meets the credit
underwriting guidelines for the loan you are requesting. And, more importantly,
you have to be able to hard-copy-guideline-document your profile.
Every nook and cranny of your financial life has to be corroborated, double- and
triple-checked, and reviewed again before closing. This way, if the originating
lender has created a loan file that is exactly consistent with published
underwriting guidelines and has documented while adhering to those guidelines,
the chances are that your loan will not be subject to repurchase.
Borrowers also need to prepare for processing and underwriting. Processors and
underwriters are the people trained and charged with gathering (processors), all
of your required-for-approval financial documents, and then approving
(underwriters), your loan. You can assume these people are well trained and very
experienced, as they are tasked with assembling and approving a
high-quality-these-people-will-pay-us-back loan file. But just how do they go
The process begins with the filter – the loan originator (a.k.a loan officer,
mortgage consultant, mortgage adviser, etc.) – tasked to match the
qualifications of a particular mortgage deal to the appropriate underwriting
guidelines. It is the filter’s job to determine if a loan scenario is approvable
and to gather the documentation to support that determination. It is here, at
the beginning of the approval process, where the deal is made or broken. The
rest of the approval process is just papering the file.
The filter determines whether the information provided by the borrower can be
validated and documented. This is simple, since most mortgages are approved by
automated underwriting engines such as Desktop Underwriter, and the automated
approval generates a list of the documents needed to paper the loan file. An
underwriter can, at this stage, request additional supporting documentation
evidence at their discretion, as not all circumstances neatly fit into the
prescribed underwriting box. If the filter creates a loan file with accurate
information, then secures the documentation resulting from the automated
underwriting findings, the loan will close uneventfully.
So, let’s begin with the pre-approval call. Mortgage pre-approval is typically
accomplished with a telephone interview. A prospective borrower calls a mortgage
rep (filter), and the questions begin. There will be lots of questions as this
critical phase of the process is akin to the discovery period in a trial –
you’ll need to disclose everything. Expect to answer queries on what you do for
a living, how long you’ve been employed in your current field, and what your
salary is. If there is a co-borrower, they will have to answer the same
Every dollar in checking, savings, investments and retirement accounts, also known as
assets to close, as well as gifts from relatives and non-profit grants, has to
be accounted for. Essentially everything appearing on a borrower’s
asset-radar-screen has to be documented and explained.
If you were previously a homeowner and sold your home in a short sale, or if you
own a home now and plan to keep it as an investment or rental property, there
are new and specific underwriting guidelines created just for you. In these
cases, full disclosure of your credit and homeownership past can potentially
eliminate unforeseen mortgage approval woes. For instance, FannieMae has a new
underwriting guideline called “Buy-and-Bail,” for current homeowners’ planning
on keeping their existing home as an investment/rental property. Properties not
meeting the 30% equity test for “Buy-and-Bail” result in additional asset
requirements to purchase a new home. Buyers with a short sale history may have
to wait two to three years before they are eligible for mortgage financing
again. Full vetting of your previous mortgage life will save you the dreaded
we-have-a-problem call from your mortgage lender.
It all comes down to your proof. If the lender asks for a specific document, give
them exactly what they are asking for, not what “should be OK,” – because it
won’t be. This is where the approval process tends to go off the rails,
when the lender asks for specific documentation and the borrower supplies
something else. Here, too, is where both sides get frustrated. So if the lender
asks for a bank statement and there are 5 pages for that bank statement, send
them all 5 pages, and not just the summary. If you send them the summary page
and they ask again, don’t complain that the lender keeps asking for the same
thing when you never sent it in the first place. This may sound elementary, but
the vast majority of mortgage approval process woes stem from scenarios just
The reason the mortgage approval process is now so rigorous is simple. Avoiding
defaults and loan buybacks has become the primary goal of mortgage
lenders. Higher standards are reducing loan defaults, which
should mean fewer foreclosures in the future. Government data shows that
less than 2% of loans originated in 2009, that were resold to Freddie Mac and Fannie Mae went
into default after 18 months, down from more than 22% default rates for 2007
So when your lender requests specific documents from you, give it them just
“because they said so.”
You can thank my dad for that.
Original Article: http://www.forbes.com/sites/moneybuilder/2012/03/09/the-perfect-loan-file-2/3/