Processing and Underwriting

Assets and liabilities:

• Assets are owned

• Liabilities are owned

• Supporting documents may be requested

• Allows 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 a borrower

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

Verification of employment:

• VOEs can be completed verbally (VVOE) or in writing (WVOE)

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

  • Verbal verification is typically done at the end of the process, prior to funding, to ensure the borrower has not made any changes to employment that would prevent them from qualifying.

Down payment sources

• Owned assets must be traceable, accessible, and not a liability (TAN)

• Allowable funds may include:

  • Cash in checking or savings accounts

  • retirement accounts

  • proceeds from sales of valuables (may require an appraisal of the items)

  • Lot equity ( for construction loans)

• Gift funds may be allowed, provided there is no expectation of repayment

• Gift letters are typically required for gift funds and must include

  • 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

• Simultaneous loans may be called purchase-money seconds or piggyback loans

• Subordinate financing is allowed, providing the loan will be:

  • Secured by the same home

  • Made to the same borrower

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

• Payments must be considered in debt ratios

  • Undisclosed, unrecorded (Silent second) mortgages are not legal

Income calculations

• Income must be calculated to the annual amount, then divided by 12

  • this prevents the MLOs from under or over qualifying the borrower

• Overtime must be consistent for at least 2 years

  • OT is not paid during vacation time

  • Assume OT is paid at time and a half unless otherwise stated

• Commission and bonus require 2-year history of receipt and likelihood of continuance

• hourly employees are assumed to work 40 hours a week unless the question states otherwise

• Base rate x hours = Weekly base

  • Weekly base x 52 = annual base

  • Annual base / 12 = monthly base

• OT rate X hours = weekly OT

  • Weekly OT x weeks worked = Annual OT

  • Annual OT / 12 = monthly OT

• Monthly base + monthly OT = gross monthly income

• Bi-weekly x 26 = Annual income

  • Annual / 12 = monthly income

• Semi-monthly x 26 = annual income

  • Annual / 12 = monthly income

• self employment income uses the net amount from the tax returns, not the gross

  • Depreciation and depletion may be added back in

  • Requires 2 year average

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

  • 2 year total / 24 = monthly income

• Commission and trade worker income may be W-2 or 1099

  • If they are 1099, use self employment calculations

  • if they are W-2, the 2 year average is still used, but we can use the gross because they aren’t self employed

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

    • 2 year total / 24 = average monthly income

Gaps in employment

• Letters of explanation may be required for any substantial gaps 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

• Together, these can be referred to as 4-Cs of credit

Credit

• The big 3 repositories (credit bureaus/CRAs)

  • Equifax

  • transunion

  • Experian

• Consumer reporting agencies consider

  • Applicant information

  • content summary

  • credit scores

  • known public records

    • Bankruptcies, judgements, foreclosures, etc

    • bankruptcies can remain on credit for up to 10 years ( use vague language if type isn’t specified)

  • Filed collection actions

  • derogatory tradelines

  • credit inquiries

  • Fraud verification alerts

Accessing credit and consumer reports

• Requires permissible purpose\

  • permissible purpose is covered by FCRA

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

Credit and consumer report red flags

• Multiple recently opened accounts

• all balance in round #s

• Recent/multiple changes in address

• PO box address (Rather than residential)

• Large number of recent inquiries

• uncharacteristic changes in credit usage

• credit history does not match
  

Why the TRI

• Mortgage lenders pull a tri-merged credit report which contains all 3 bureaus

  • 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 the ability to repay the loan, not willingness

• Can include verified income and assets

qualification ratios

• includes consideration of front-end and back-end debt to income ratios

Front-end DTI

• Also known as housing expense ratio

• includes PITI(A)

  • Principle

  • interest

  • taxes

  • insurance

  • association (if applicable)

• PITI(A) / gross monthly income = front end DTI

• Acceptable ratios based on programs

  • Conventional = 28%

  • FHA = 31%

  • USDA = 29%

  • VA = NA

Back-end DTI

• Also known as total expense ratio

• Includes PITIA and other contractual obligations

  • contractual obligations or non-cancellable debts include credit cards, car loans/leases, court ordered payments (child support, alimony, etc) student loans.

  • Installment debts with 10 or less payments may be excluded, unless it is a car lease

  • cancellable debts include gym memberships, cable/phone/internet, utilities, car insurance, etc, are not included in DTI

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

• Acceptable ratios based on programs

  • Conventional = 36%

  • FHA = 43%

  • USDA = 41%

  • VA = 41% + residual income analysis

  • back end should always be same or higher

Loan to Value

• Relationship between loan and appraisal/ fair market value

• Values are established by a licensed/certified appraiser or an automated valuation model (AVM)

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

  • If the transaction is a refinance, the appraisal value is used

• Loan amount / value

Combined loan to value

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

• (1st mortgage balance + 2nd mortgage balance) / value

High/total Loan-To-Value

• High Loan-to-value (HLTV), high-combined loan-to-value (HCLTV), total loan to value (TLTV), high-total loan-to-value (HTLTV)

  • HLTV and TLTV are most common

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

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

Tangible Net benefit

• Benefit to borrower

• Intended to prevent loan flipping

  • Loan flipping is the repeated refinancing of a property and rolling in any closing costs

  • results in equity stripping

  • considered a predatory practice

  • If the borrower is aware that flipping is happening and they are involved/ benefiting financially, it’s called churning

• TNB must be considered in an underwriter’s decisioning of a loan file

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