Here are five quick tips loan originators can use to help prevent FHA mortgages from falling through during processing. For some mortgage originators these tips will seem ridiculously basic. Unfortunately, conversations with FHA underwriters show me that many loan officers haven’t caught on to these ideas yet.
1. Make sure the loan you are submitting makes common sense.
Incredibly, this is one of the most common mistakes made by originators who entered the mortgage business within the last 5 to 7 years. Subprime programs generally only required that the loan fit into their matrix and never cared about the reasons the person had credit problems. Make sure that you can verbalize a good case that it makes sense to believe that this borrower can reasonably be expected to make the payments on the loan. Often this requires asking a lot of uncomfortable questions of the borrower to make sure that you truly understand their situation. Even when your submission is approved by the automated underwriting system and theoretically the underwriter needs only to validate the information and does not need to make a credit decision, the underwriter may well find something wrong if the loan does not make common sense. Lenders are held accountable by HUD for loans that default. They can always find a reason to override the automated underwriting findings if they want to.
Stating a good case for loan approval is even more important when the FHA Total Scorecard underwriting system has referred your loan to an underwriter to make the decision. Do not ever assume that just because the debt to income ratios meet guidelines and the borrower hasn’t been late on any payments in the last 12 months that you don’t need to submit a well constructed cover letter with your loan – in addition to the borrower’s own credit explanation. Make sure that both your cover letter and the borrower’s explanation fully account for what happened to cause the borrower to have credit problems and why the underwriter should now believe that the borrower has solved the problem.
Loan officers who “grew up” in the days of subprime lending based on credit scores and matrices often foolishly leave it up to the underwriter to probe through a huge stack of papers in the submission to come up with their own justification for approving the loan. Rest assured that the underwriter is too busy to do that and will only gripe about you to their colleagues after they give you an approval with a stack of conditions which are often impossible to comply with. This is one of the most common rookie causes for real estate closing delays. Let the underwriters know what you want them to base their decision on and you stand a greater chance of getting an easy approval with conditions you can comply with.
2. Check the CAIVRS number before processing the loan.
CAIVRS stands for Credit Alert Interactive Voice Response System. Don’t ask me why HUD sometimes transposes that to CAVIRS instead of CAIVRS in their own documentation. I guess it sometimes serves their purposes to keep the public confused?
The CAIVRS system verifies that the borrower has not been disqualified from using government insured financing because of past defaulted FHA/VA mortgages, student loans, or any of several other reasons. An amazing number of people are not aware that they have officially been excluded from FHA financing. This commonly happens due to “charged off” student loans that the borrower may have long forgotten about and which also do not show up on their credit report any longer. Just slightly less common are cases where the borrower’s ex-spouse was foreclosed upon and the borrower says they were not even aware of the situation. Strangely, even this fails to show up on the borrower’s credit report fairly often.
Whatever your company’s procedures, make sure you check the CAIVRS as early as possible.
3. Collect all the correct documents.
Make sure you have documentation to support the information you entered into the automated underwriting system, or that was mentioned in your cover letter and the borrower’s explanation letter. Surprisingly again, many loan originators fail to think ahead strategically when compiling their loan submission package. Loans which started out with an approval from FHA Total Scorecard often revert while in process to a “referred to underwriter” status.
First, this would occur much less often if originators took the extra few minutes necessary to verify the information being submitted by examining original paystubs, W2s, divorce decrees, bankruptcy filings and other support documentation before turning the loan over to their processor.
Second, if the loan is later unexpectedly downgraded to refer status, much more documentation is needed.
Here are a few quick but painful examples of that.
When there is no valid automated approval the borrower’s rental history must be verified. I have seen many loans fall through at this stage because the loan officer failed to even ask the borrower if their rent had been paid on time! Remember, the rental history is not a factor if the loan is approved by automated underwriting because that history is not shown on a borrower’s credit report.
Another common version of this problem occurs when the loan officer fails to examine documentation showing that extra income (for example, child support payments) has been received consistently in the past and that payment is going to continue. Again, the loan ends up falling apart well into the processing stage, leading to much greater frustration and anger from borrowers and real estate agents thus disappointed.
An equally common mistake is not verifying that a retirement account submitted on the application as an asset can legally be liquidated if necessary. For example, many teachers have substantial funds in their retirement accounts, but these funds often can not be liquidated unless the teacher is fired or dies. These funds are not considered to be liquid assets but many rookie loan officers get automated approvals based on these funds which subsequently go down in flames.
4. Compute the income accurately.
Sounds obvious, I know, but tales of mortgage closings which fall through because the borrower’s ratio of debt to income is too high are legion among real estate agents as they swear to never use that particular mortgage broker or lender again. Real estate agents and borrowers are reasonably amazed that such a basic element of the loan approval process could have slipped by the mortgage originator’s attention until so late in the process.
Here’s what happened. The loan officer asked the borrower “How much do you make?”. The borrower told them an amount from their last paycheck, or worse an amount from their best paycheck. The loan officer submitted the loan through automated underwriting and received an approval so they told the agents and borrower to go ahead with their purchase offer only to find out after finalization of the purchase contract that 30% of the borrower’s income comes from overtime pay they have only been receiving for the last year. Oops, this doesn’t fit into FHA guidelines. Alternatively, the loan officer does look at the borrowers paycheck ahead of time, but fails to note that part of the gross pay comes from overtime or bonus pay or commission pay. So the originator submits the gross income, but it isn’t entered into the system correctly and factors such as commission income actually play an important part in the automated systems risk analysis of the loan. Either way the result is not good for the parties involved.
One effective strategy to prevent this is to be very conservative in determining the borrower’s qualifying income and not count bonuses and overtime pay when submitting the loan for automated approval unless absolutely necessary. If the borrower has been qualified with less than the maximum income that can be squeezed into the loan officer’s calculations, unpleasant surprises are less likely to occur.
5. Be sure you have ALL the borrowers assets listed and listed correctly.
Loan officers frequently fail to gather complete information on all the borrower’s assets once they have an automated approval. Once again, automated approvals are downgraded to “referred to underwriter” status fairly frequently for many strange and different reasons. A good strategy for the mortgage originator is to gather documentation for every dime in every account the borrower has squirreled away anywhere, but submit the loan through the automated underwriting system with the fewest assets necessary to get an approval. When the loan is downgraded later on, the extra assets can often save the loan officer’s reputation.
Another common mistake regarding assets has already been mentioned. The assets must be verifiably liquid. For this reason, FHA guidelines require that the loan file include proof that the assets would be available to the borrower without being fired or dying. In addition, due to potential withdrawal penalties, FHA loan guidelines will allow only 60% of the vested amount of the account to be counted towards the borrower’s liquid reserves. Frequently, the entire balance has been submitted into the automated underwriting system.
These 5 tips won’t guarantee your deal will go through underwriting without a hitch. After all, FHA guidelines seem to change daily now, but a little attention to these details will go a long way toward improving your reputation among borrowers and real estate agents.