The perfect credit file
The media got it all wrong – securing mortgage approval and adhering to lending guidelines are not the difficulties that plague mortgage consumers. Most people fail to meet the strict documentation requirements. The good news is the solution is simple. Just scan, photocopy, fax and submit every aspect of your financial life. Then check everything again shortly before closing.
Mortgage customers who step into the mortgage approval process and are ready to fight their chosen mortgage lender will tell a nightmare story. Since the process, requirements, and guidelines are the same for everyone, your mindset is the most important factor. Accepting the redundant documentation required for lender approval will make everyone’s life easier.
When I was a child my father would occasionally give instructions that I naturally found superfluous, and when asked why I should do what he wanted, he often replied, “Because I said so.” That never seemed my question answering, but always left me without a reply, and I would normally follow. This is exactly what consumers should be doing during the mortgage approval process. If your lender seems to ask for too much documentation and you are wondering why you need it, accept the simple regulation – “because I said it”. You will find that the mortgage approval process is a lot less frustrating.
So what is the perfect loan? Well, it’s one that (a) repays the lender and (b) repays the lender on time. Drawing the perfect loan is not the goal that mortgage lenders are aiming for today.
The real goal is the perfect credit record.
Mortgage lenders have suffered staggering losses and gone out of business due to the dreaded loan buyback. As mortgage defaults increased, FannieMae and FreddieMac began reviewing mortgage loans they had purchased and discovered substandard and fraudulent underwriting practices that violated the representations and warranties made. Fannie and Freddie began forcing the original lenders of these “bad” loans to buy them back. For example, a small correspondent mortgage lender is forced to buy back a single $ 250,000 mortgage loan. For a small mortgage company, this means a loss of $ 250,000 on a single loan because it is never repaid.
It doesn’t take many of those lazy loan buybacks to close the doors of many small mortgage deals. The lenders suffered billions in losses buying back loans from Fannie and Freddie and began doing the same for loans they had bought from smaller lenders.
The small and medium-sized mortgage lenders that survived established policies and procedures for underwriting to eliminate the risk of future losses by repurchasing loans. The answer? The perfect credit file.
Excellent creditworthiness, a large down payment and stable employment with sufficient income to secure debt servicing are no longer required. However, you must have a borrower profile that matches the lending guidelines for the loan you want. More importantly, you need to be able to document your profile on paper.
Every corner of your financial life needs to be verified, double-checked, triple-checked and double-checked before closing. In this manner, if the original lender created a credit file that exactly conforms to published underwriting guidelines and has documented compliance with those guidelines, there is a chance that your loan will not be repurchased.
Borrowers also need to prepare for the settlement and underwriting. Processors and insurers are the people who are trained and mandated to put together all of your financial documents required for approval (processors) and then approve your loan (insurers). You can assume that these people are well trained and highly experienced as they are tasked with putting together and approving a high quality “these people will pay us back” loan file. But how do you deal with it?
The process begins with the filter – the lender (also known as a loan officer, mortgage advisor, mortgage advisor, etc.) – tasked with matching the qualifications of a particular mortgage deal against the appropriate underwriting guidelines. It is the job of the filter to determine whether a credit scenario is approvable and to collect the documentation to support that determination. Here, at the beginning of the approval process, the deal is closed or canceled. The rest of the approval process is just papering the file.
The filter determines whether the borrower’s details can be validated and documented. It is easy to do because most mortgages are approved by automated underwriting engines such as Desktop Underwriter, and the automated approval generates a list of the documents required for paper documentation of the loan file. In this phase, an underwriter can, at his own discretion, request additional supporting documentation, as not all circumstances exactly fit into the prescribed underwriting box. If the filter creates a credit file with correct information and then saves the documents resulting from the automated underwriting findings, the loan is closed without an event.
So let’s start with the pre-approval call. Pre-approval of mortgages is usually done with a telephone interview. A prospective borrower calls a mortgage agent (filter) and the questions begin. Many questions will arise because this critical phase of the process is like the discovery phase in a process – you need to disclose everything. Expect to answer questions about what you do for a living, how long you’ve been in your current area, and what your salary is. If there is a co-borrower, they must answer the same questions.
Every dollar of checking, savings, investment, and retirement accounts, also known as closing assets, as well as gifts from relatives and charitable contributions, must be settled. Basically, anything that appears on a borrower’s asset radar screen needs to be documented and explained.
If you were previously a homeowner and sold your home in a short sale, or if you now own a home and want to keep it as an investment or rental, there are new and specific drawing guidelines created just for you. In these cases, having full disclosure of your credit and home ownership history can clear up potentially unforeseen mortgage approval problems. For example, FannieMae has a new underwriting policy called “Buy and Bail” for current homeowners planning to keep their existing home as an investment / rental. Properties that fail the 30% equity test for “buy and bail” lead to additional wealth requirements for the purchase of a new home. Buyers with a short sales history may have to wait two to three years to be eligible for mortgage financing again. A full review of your previous mortgage term saves you the dreaded phone call from your mortgage lender that we have a problem.
It all depends on your evidence. When the lender asks for a specific document, give them exactly what they ask, not what “should be okay” – because it won’t be. This is where the approval process tends to get out of hand if the lender asks for certain documents and the borrower provides something else. Again, both sides are frustrated. So if the lender asks for a bank statement and that bank statement has 5 pages, send them all 5 pages, not just the summary. If you send them the summary page and ask them again, don’t complain that the lender keeps asking for the same thing even though you never sent it. This may sound basic, but the vast majority of problems in the mortgage approval process stem from such scenarios.
The reason the mortgage approval process is now so strict is simple. Avoiding defaults and loan buybacks has become a primary goal of mortgage lenders. Higher standards reduce loan defaults, which should mean fewer foreclosures in the future. Government data shows that in 2009 less than 2% of the loans that were resold to were granted
So if your lender asks you for certain documents, just give them “because they told you to”.
You can thank my father for that.