Processing and Underwriting

Assets and liabilities

• Assets are owned

• liabilities are owned

• Supporting documents may be requested

• Allows the lender to verify that the determined debt ratios are accurate

Income

• Annual income is analyzed

• Monthly income is calculated based on the annual amount to avoid under or over qualifying the borrower

• Must be verified for accuracy using records from the borrowers employer, IRS (form 4506) and/or depository institutions/check cashing records

Verification of employment (VOE)

• Can be Verbal (VVOE) or written (WVOE)

• initial VOE is typically done in writing as part of underwriting process

• verbal VOE is typically done at the end of the process to ensure the borrower has not made any changes in employment that can change qualifications

Owned assets

Must be traceable, accessible, and not a liability (TAN)

Allowable funds in down payments

• Cash in checking or savings accounts

• retirement accounts

• proceeds from sale of valuables

• Lot equity (from construction loans)

• Gift funds (provided there is no expectation of repayment)

Requirements for gift funds in the gift letter

• Description of the relationship

• Statements that the funds must be used for home purchase

• Address of the home the applicant is purchasing

• Assurance that the donor does not expect repayment

• Source of funds

• signature of donor

Piggyback/ purchase money second loan requirements

• Secured by the same home

• Made to the same borrower

• Consummated at the same time, prior to, or immediately after the principal loan

Silent Second

Undisclosed/unrecorded mortgages are not legal, and all payments must be considered in debt ratios

Overtime requirements

• Must be consistent for at least 2 years

• Assume OT is paid at time and a half (1.5 * Hourly)

Commission and bonus pay

Require 2 year history of receipt and likelihood of continuance

Bi-weekly income calculation

• Bi-weekly x 26 = annual income

  • Divide by 12 = Monthly income

Semi-monthly income calculation

• Semi-monthly x 24 = annual income

  • Divide by 12 = Monthly income

Self-employment income calculations

• Uses the net amount from tax returns, not the gross

• Depreciation and depletion may be added back in

• requires 2 year overages

• Year 1 net income + 2 year net income = 2 year total

  • 2 year total divided by 24 = net monthly income

Commission and trade worker income

• May be W-2 or 1099

• If 1099, use self employment calculations

• If the W-2 is used, also use the self-employment calculations, but with gross income.

• year 1 gross income + year 2 gross income = 2 year total

  • 2 year total / 24 = average monthly income

Gaps in employment

• Letters of explanation may be required for any substantial gap in employment

• Lenders set their own standards for what is considered substantial

Credit and consumer report

• Underwriters consider applicant and collateral when evaluating a transaction

  • Applicant includes credit, capacity, and capital

  • Collateral describes the home being financed

Consumer reporting agencies consider:

• Applicant info

• Content summary

• credit score

• known public records (bankruptcies, foreclosures, judgements, etc)

• Filed collection actions

• Derogatory tradelines

• Credit inquiries

  • Fraud verification alerts

Accessing credit and consumer reports

• Requires permissible purpose

• users must have permission from borrower and a legitimate business need

Consumer and credit report red flags

• Multiple recently opened accounts

• All balances in round #s

• Recent/multiple changes in address

• PO Box address

• Large number of recent inquiries

• uncharacteristic changes in credit usage

• credit history does not match

Why the TRI-merged credit report

• Not all furnishers report to all 3 bureaus

• Each bureau uses a slightly different scoring model

• Not all scores are the same

• gives lenders a better picture of the risk level

  • other credit products may only require 1 score, so not all inquiries will show on all bureaus

Capacity

• Refers to ability to repay loan, not willingness

  • Can include verified income and assets

Front-end DTI (housing expense ratio)

• Includes PITI(A)

  • Principle

  • interest

  • taxes

  • insurance

  • association (if applicable)

Front end DTI calculation

PITIA / gross monthly income = Front-end DTI

Conventional loan Front end/back end DTI

28% / 36%

FHA loan front end/ back end DTI

31% / 43%

USDA loan front end/back end DTI

29% / 41%

VA loan Front end/ back end DTI

N/A / 41% + residual income analysis

Back-end DTI (total expense ratio)

• Includes PITIA and other contractual obligations

• Contractual obligations includes car payment, credit cards, court ordered payments, etc

  • Does not include car insurance, phone bill, gym memberships, etc)

Back-end DTI calculation

(PITI(A)) + (Contractual obligations) / (gross monthly income) = back end DTI

Loan-to-value

• relationship between loan and appraisal/fair market value

• values are estimated by an licensed/ certified appraiser or an automated valuation model (AVM)

• Lenders must base LTV off of the lesser of the appraised value or purchase price

  • If Refi transaction, the appraised value is used

Combined loan to value

• Includes the balance on a second mortgage in addition to the first

  • (1st lien balance) + (subordinate lien balance) / value

High/total Loan-to-value

• High loan to value(HLTV) , High-combines loan to value (HCLTV) , Total loan to value (TLTV) , high-total loan to value (HTLTV)

• Includes limit of a second-lien HELOC in addition to first mortgage balance

  • (1st mortgage balance + HELOC limit) / Value

Tangible net benefit

• Benefit to borrower

• Intended to prevent loan flipping

  • Tangible net benefit (TNB) must be considered in an underwriters decisioning of a loan file

Loan flipping

• Repeated refinance of a property and rolling in any closing costs

• Results in equity stripping

• considered a predatory practice

• If borrower is aware of loan flipping and receiving a kickback, it is called churning.