May 6th, 2013 4:26 PM by Bob Rutledge
This article was written with the intention of making the loan application process easier for you and to answer your questions and concerns about why we as mortgage lenders ask for so much documentation and why we are specific as to what we ask for.
The media has it all wrong – securing a mortgage approval and satisfying credit underwriting guidelines are not the difficulties plaguing mortgage consumers. What is the plague is the extent our borrowers go through meeting the rigorous documentation requirements that are so necessary today. The good news is that the fix is simple. Just scan, photocopy, fax, and deliver every aspect of your financial life. Then, shortly before closing, check everything again.
Borrowers who enter the mortgage approval process resisting the need for documentation will always come out with a nightmare story to tell. As the process, requirements, and guidelines are the same for everybody, the right mindset is the game-changer. Accepting the redundant documentation necessary for lender approval will make everyone’s life easier, especially the borrower’s. Better is to be prepared, having as much of the required documentation before application is key to an easier mortgage application.
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.
Since 2008, most mortgage lenders have suffered staggering losses and gone out of business because of the dreaded loan repurchase. As mortgage delinquencies increased, FannieMae and FreddieMac the conventional side of the business and FHA, VA, and USDA, the Governmental side began to ardently 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. The Conventional and Governmental side began forcing the originating lenders of these “bad” loans to buy them back. So a small 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 any small mortgage operations. The larger lending houses suffered billions of dollars of losses repurchasing loans, and began to do the same thing for loans they had purchased from smaller originators.
The small, medium and especially the larger 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.
Everything in the mortgage industry revolves around risk, risk assessment, risk reduction, and risk management.
It’s no longer necessary to have excellent credit, a sufficient down payment and stable employment with enough income to support your debt service to guarantee your loan approval. 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 everything.
Everything that will be used as part of your mortgage application has to be corroborated, double- and sometimes 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 based on the documentation gathered.
Know that these people are well trained and very experienced, as they are tasked with assembling and approving a high-quality-these-borrowers-will-pay-us-back loan file. But just how do they go about that?
The process begins with the Loan Originator (aka loan officer, mortgage consultant, mortgage adviser, etc.) – tasked to match the qualifications of a particular mortgage borrower to the appropriate underwriting guidelines. It is the Originator’s job to make an initial determination as to whether 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 simply just documenting the file to support the information provided by the borrower to the Loan Originator.
The Originator determines whether the information provided by the borrower can be validated and documented. This can be simple, since most mortgages are approved by automated underwriting engines (AUS) such as Desktop Underwriter, and the automated approval generates a list of the documents needed to paper the loan file, the Processor is the gatherer of the list of documentation. The Processor will gather the list of documentation determined by the AUS findings, when all documents are in the file the loan application moves forward to the Underwriter. An Underwriter can, at this stage, request additional supporting documentation at their discretion, as not all circumstances neatly fit into the prescribed underwriting box. If the Originator creates a loan file with accurate information and the Processor secures the documentation resulting from the automated underwriting findings, the loan will close. When the application closes is entirely determined by the timing, completion, and the accuracy of the documentation.
So, let’s begin with the pre-approval call. Mortgage pre-approval is typically accomplished with a telephone interview, face to face, on-line application, or any combination. A prospective borrower calls a mortgage loan originator, 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. The information from the pre-approval call is what is then entered into the automated underwriting system and everything is based on this information and resulting AUS findings/approval unless the documentation supporting the initial information differs.
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 track, when the lender asks for specific documentation and the borrower supplies something else. Here, too, is where both sides get frustrated. 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. This may sound elementary, but the vast majority of mortgage approval process troubles stem from scenarios just like this. Better to give your lender more than less.
The reason the mortgage approval process is now so rigorous is simple. Avoiding defaults and loan buybacks has become the primary goal of all mortgage lenders. Higher standards are reducing loan defaults, which should mean fewer foreclosures in the future. Government data is proving this to be true and everyone in the mortgage industry believes that thorough documentation and re-checking is working to secure the industry, it appears the process is here to stay for the time being.
So when your lender requests specific documents from you, give it to them and if you question yourself as to what you should provide, just provide it all. If you cannot supply the required documentation then contact your lender immediately, there may be a solution. The application process will go faster and easier, which in the end is what we all want.