Mortgage underwriting in the United States is the process that lenders use to determine whether the risk of offering a mortgage loan to a particular borrower under certain parameters is acceptable. Most of the risks and requirements deemed by the guarantor are under three C underwriting: credit, capacity, and collateral.
To help the guarantor assess the quality of loans, banks and lenders make guidelines and even computer models that analyze different aspects of mortgages and provide recommendations on the risks involved. Because the big securitizers like GSE and other banks are big buyers of loans from the originators, and since many creators do not have balance sheets to hold loans for a long time, the automatic guarantee guidelines are crucial determinants of whether a mortgage will be made and at what price. However, it is always up to the underwriter to make a final decision on whether to approve or refuse the loan.
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Credit report
Credit is what an underwriter uses to review how well a borrower manages his current and past debt. Usually documented by credit reports from each of the three credit bureaus, Equifax, Transunion, and Experian, credit reports provide information such as credit scores, current and past borrower information about credit cards, loans, collections, repossessions and foreclosures and records public (tax lien, valuation and bankruptcy). Typically, borrower's credit is strongly related to the likelihood that the loan will fail (fail to make monthly installments).
In reviewing credit reports, credit scores are considered. The credit score is an indicator of how well the borrower manages the debt. Using a mathematical model, data on each item on the credit report is used to generate numbers between 350 and 850, known as credit scores. Higher scores represent those who are less risky. When lenders refer to a representative credit score, they refer to the median score. When many borrowers are involved, usually the borrower with the lowest middle value is considered a representative credit score. Other lending programs can consider the people who make the most money, also known as the main breadwinner, who has a credit score representative. In many loan programs there is a minimum score guideline.
The most influential aspect of a credit report is the quality of credit on a person's current housing. For example, if the borrower already has a mortgage, whether the borrower has paid the mortgage on time is an indication of how well they will pay in the future. This also applies to people who hire. The lender will usually analyze the last 12-24 months of the borrower's housing history (also called Recording History). Delinquency during that time period is usually unacceptable.
In addition, the history of loan payments and revolving credit is considered. The lender may require that some deposit accounts be opened for at least 24 months and have up-to-date activity with timely payments to establish responsible credit usage patterns.
The credit report also contains a degrading past credit borrower. These include collections, off charges, repossession, foreclosures, bankruptcies, liens and judgments. Usually, if any of these items are present in the report, it increases the risk of the loan. For more serious disabilities such as foreclosures and bankruptcies, the lender may require up to two to seven years from the date of satisfaction indicated by the report before approving the loan. Further, the lender may ask the borrower to rebuild the credit by obtaining a number of new credits to rebuild their credit. It is also the prerogative of the lender to require that all collections, bills, liens, and assessments be paid before closing the loan.
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Analysis of revenue
Capacity refers to the borrower's ability to make payments on the loan. To determine this, the underwriter will analyze the work of the borrower, their income, their current debt and their assets.
When reviewing the work of the borrower, the underwriter must determine the stability of earnings. People employed by firms and earning hourly wages pose the lowest risk. Self-employed borrowers have the highest risk, because they are usually responsible for the debt and welfare of the business in addition to their personal responsibilities. Commission revenue also carries a similar risk in revenue stability because if for whatever reason the borrower fails to generate business, it directly affects the amount of revenue generated. Usually if an entrepreneurial income or commission is used to qualify for a mortgage, a two-year acceptance history is required. Although bonuses (sometimes indicated as "payment incentives" by many companies) are part of paystub revenue, a two-year employer's verification is also required.
Income documentation also varies depending on the type of income. The lowest-paying hourly wages usually need to provide paystubs and W-2 reports. However, self-employed, assigned and those who collect the lease are required to provide tax refund (Schedule C, Schedule E and K-1). Individual pensioners are required to prove that they are eligible for social security and document receipt of payments, while those who receive income through cash investments must provide a statement and determine the continuation of the proceeds from the payment. In short, underwriters must determine and document that income and employment are stable enough to pay mortgages in the coming years.
Furthermore, the underwriter evaluates the capacity to repay the loan using a comparative method known as the debt to earnings ratio. This is calculated by adding monthly obligations and liabilities (mortgage payments, monthly loans and loan payments, child support, benefits, etc.) and dividing by monthly income. For example, if a borrower has a $ 500 car payment, $ 100 in credit and loan payments, pays $ 500 in child support and wants a mortgage with a $ 1,000 payment per month, his total monthly liability is $ 2,100. If he earns $ 5,000 per month, his debt to earnings ratio is 42%. Usually the ratio should be below anywhere from 32% for the most conservative loan to 65% for the most aggressive loan.
Assets are also considered when evaluating capacity. Borrowers who have abundant liquid assets at closing have statistically had a lower failure rate on their mortgages. This is referred to as reserves by industry. For example, with a total mortgage payment is $ 1,000 per month and the borrower has $ 3,000 left after paying the down payment and closing costs, the borrower has three months of reserves. Underwriters also looked closely at bank statements for NSF incidents (insufficient funds). If this happens on a regular basis, this is a red flag with an underwriter because it indicates that the borrower does not know how to manage his finances.
When a borrower receives a reward for an advance payment, the asset must be verified. Any large deposits, in fact, indicate on bank statements will require an explanation from the borrower.
Furthermore, if the borrower's work is disrupted for any reason, the borrower will have enough spare money to pay their mortgage. The amount of cash reserves is eligible for the amount of payments that the borrower can make on his total home expenses (total principal and interest payments, taxes, insurance, homeowners' insurance, mortgage insurance, and other applicable fees) before the reserves are completely discharged. Often lenders require two to twelve monthly payments everywhere. If the borrower submits an FHA (Federal Housing Administration) request, no backup is required.
The most common assets are checking accounts and borrower's savings. Other sources include pension funds (401K, Individual Retirement Account), investments (stocks, mutual funds, CDs) and other sources of liquid funds. Funds that have a penalty for withdrawal should be considered conservatively and evaluated at 70% or less of their value. Accounts such as pensions and other accounts and private property that lack liquidity can not be used as assets.
Warranty
Collateral refers to the type of property, value, use of the property and all related to these aspects. Property types can be classified as follows in the order of risk from lowest to highest: single family residence, PUD, duplex, townhouses, low-rise condominiums, high-rise condominiums, triplex and four plexes and condotels. Residential is also considered as part of the collateral. A house can be occupied by the owner, used as a second home or investment. The homeowner is occupied and the second has the least amount of defaults, while the investment property has a higher failure rate. Depending on the combination of shelter and type of collateral, the lender will adjust the amount of risk they are willing to take.
In addition to the type of occupancy and property, the value is also considered. It is important to realize price, value and cost are three different characteristics of a house. The price is the dollar amount that the seller agrees to sell the house to the other party. Cost is the amount of dollars needed to build a house including labor and materials. The value, which is usually the most important characteristic, is the dollar amount backed by recent property sales that have similar characteristics, in the same environment and appeal to consumers. In a fair marketing situation when the seller is not in trouble and the housing market is not in a volatile condition, the price and value must be very comparable.
To determine the value, usually an assessment is obtained. In addition to determining the value of the property, it is the responsibility of the assessor to identify market conditions, attractiveness and environmental facilities as well as the conditions and characteristics of the property. Values ​​are determined by comparing recent sales from similar neighboring properties. Appraisers can make reasonable adjustments to the sale price of other properties for lot size, square house area, number of bedrooms and bathrooms and other extras like garage, swimming pool and deck. It is the responsibility of the person responsible for reviewing the assessment and requesting further information necessary to support the value and selling of the property. If the house needs to be taken over, the lender must be able to sell the property to cover their losses.
The comparative analysis of collateral is known as loan to value (LTV). Loan to value is the ratio of the loan amount to the property value. In addition, the combined loan to value (CLTV) is the sum of all liens against property divided by value. For example if the house is worth $ 200,000 and the first mortgage is $ 100,000 with a second mortgage of $ 50,000, LTV is 50% while CLTV is 75%. Typically, LTV and higher CLTVs increase the risk of lending. Further, borrowers who contributed significant down payment (downgrading LTV) have statistically lower incidence of foreclosures.
This type of loan may also affect LTV and be considered when evaluating collateral. Most loans include payments on the principal balance of the mortgage. This is the lowest risk since LTV declines because mortgage payments are paid. Recently, interest-only mortgages have become increasingly popular. This mortgage allows the borrower to make payments that only meet the interest due on the loan without contributing to the principal balance. In addition, there are loans that allow negative amortization, which means payments do not meet interest due to loans. Therefore, the unpaid interest is then added to the principal balance of the loan. In this case, it is possible to owe more than home value over the life of the loan, which causes the lender to have the highest risk.
To offset the high risk of LTV, lenders may require so-called mortgage insurance. Mortgage insurance guarantees the creditor against any losses that may occur when the borrower fails to pay on his mortgage. Typically, this is required on loans that have LTV that exceed 80%. The cost of mortgage insurance is passed on to the borrower as an additional fee for their monthly payments, but some banks allow what is called lender insurance, where interest rates are higher in return for lenders who pay mortgage insurance. All government loans such as FHA and VA require mortgage insurance, regardless of LTV.
Automatic explanation
Fannie Mae and Freddie Mac are the two largest companies that buy mortgages from other lenders in the United States. Many lenders will bear their files according to their guidelines, but to ensure eligibility to be purchased by Fannie Mae and Freddie Mac, the guarantor will use so-called automated underwriting. This is a tool available for lenders to provide recommendations on borrower and borrower risks and this provides the amount of documentation required to verify risk.
It is important to remember that approval and feedback are subject to underwriter reviews. It is also the responsibility of the underwriter to evaluate the loan aspects that are outside the scope of the automated warranty. In short, it is the guarantor who approves the loan, not the automatic guarantee.
On the other hand, automated underwriting has shortened the mortgage process by providing analysis of credit terms and loans in minutes rather than days. For the borrower reduces the amount of documentation required and may not even require job documentation, income, assets or even property values. The guarantor automatically adjusts the amount of documentation required in proportion to the loan risk.
Documentation is reduced
Many banks also offer documentation reduction loans that allow borrowers to qualify for a mortgage without verifying items like income or assets. Of course this is a high-risk loan and often comes with higher interest rates. Because the documentation provided is lacking in the capacity of the borrower, there is a high emphasis on credit and collateral. To reduce the risk of reduced documentation loans, lenders often will not lend to higher LTVs and restrict loans to smaller loan amounts, as opposed to fully documented loans.
Approval decision
After reviewing all aspects of the loan, it is up to the underwriter to assess the overall loan risk. Each borrower and each loan is unique and many borrowers may not comply with any guidelines. However, certain aspects of the loan can compensate for deficiencies in other areas. For example, high LTV risks can be offset by a large number of assets. Low LTV can compensate for the fact that borrowers have high debt-to-income ratios and excellent credit can overcome the shortage of assets.
In addition to the compensation factor, there is a concept known as risk coating . For example, if a property is a high-rise condo, occupied as an investment, with high LTV and self-employed borrowers, the cumulative effect of all these aspects leads to a higher risk. Although the borrower can meet all the requirements under the loan program guidelines, the underwriter must be careful.
There is an old saying in lending: If your portfolio does not have one foreclosure, you do not accept enough risk. Underwriters should review loans from a holistic viewpoint; otherwise they may resist high-risk loans in one aspect but low risk overall.
IT System
Banks generally use IT systems available from various vendors to record and analyze information, and the system has mushroomed. This is the primer of what many of them mean. These include "loan origination system" (also called loan operating system) (LOS) as well as other tools such as Fannie Mae's automated underwriting system and Freddie Mac "Underwriters Desktop" and "Prospective Borrowers." Examples of LOS are CreditPath by Davis Henderson and Fiserv's UniFi PRO.
References
External links
- National Association of Mortgage UnderwritersÃ,® (NAMUÃ,®)
- Fannie Mae
Source of the article : Wikipedia
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