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Monday, April 27, 2015

The Perfect Loan File Article Republished by Popular Demand

Forbes


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MoneyBuilder  PERSONAL FINANCE


The Perfect Loan File


Mark, Greene , Contributor



Opinions expressed by


Forbes


contributors are their own.




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 everything again.


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 gamechanger.


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 i t 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 b ad


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 i t 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 t<


hard-copy-guideline-document your profile.


Every nook and cranny of your financial life has to be corroborated, double- and triplechecked,


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 about that?


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. I t is the filter's job to


determine i f a loan scenario is approvable and to gather the documentation to support


that determination. I t 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. I f thi


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 questions.


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.


I f you were previously a homeowner and sold your home in a short sale, or if you own a


home now and plan to keep i t 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 "Buyand-


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 i t 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 side;


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 like this.


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 loans.


So when your lender requests specific documents from you, give it to them just "because


they said so."


You can thank my dad for that.


This article is available online at: http://onforb.es/A2ljAO 2014 Forbes.com LLC ™ All Rights Reserve








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