Underwriting a Loan

What are lenders looking for in underwriting?

Underwriters are typically looking for 4 things when they see a loan(the 4 Cs):

Cash
Credit
Capacity
Collateral

Cash: How much does the borrower have in liquid assets? Bank accounts, stocks, bonds, etc. They basically want to know if the borrower has enough money in order to close the loan.

Credit: What is the borrower's credit history? This doesn't just have to do with the credit score. The lender will run a credit report, and the underwriter will check to see how the borrower makes payments(on time?) and how much debt that the borrower has.

Capacity: Is the borrower able to repay the loan? The lender looks at the borrower's Debt-to-Income ratio. First, they look at how much money (before taxes) a person makes per month. Then they look at the total amount of debts that person will have (including the mortgage). They will calculate this to show a debt to income ratio.

Example: Borrower makes $5000/month.
Borrower has debts of $3000/month.
This would make the person's debt-to-income ratio 60%.

The underwriter will look at this and say, "can this person live on the rest of that income for the rest of the month?" Remember, you have to then take out taxes, and these debts don't include the cost of living such as food, phone bill, cable, etc. If this doesn't make sense, the underwriter won't approve the loan. A good Debt-to-income ratio will be about 35-40%. If you are much above this, you may want to look at your budget and decide if this is the time that you should be buying a home.

Collateral: How much does the house appraise for? The lender wants to make sure that the worth of the house is enough to make up for the loan if the house goes into foreclosure.


It is in the borrower's control for the cash, capacity and credit, but the borrower doesn't have much control over the collateral part. Make sure that you are focusing on the first three to ensure that you will get a loan approved and you should most likely be approved for a loan!

FHA versus Conventional

What are some of the major differences between FHA(Federal Housing Administration) loans and Conventional loans?



With an FHA loan you need to bring in 3.5% as a downpayment. For a conventional loan, you must bring in a 5% downpayment.



With a conventional loan, if you bring in a 20% downpayment, you will not have to pay PMI(private mortgage insurance). With a FHA loan, you will always have to pay MIP(mortgage insurance premium) as well as PMI.



FHA has different standards with appraisals, but don't let this scare you. They are a little more strict on safety issues (which you probably want anyway).



With a conventional loan, you will need a higher credit score than for a FHA loan. FHA will approve you if you have a 620 credit score (I recommend that you take care of your credit, but if you have had a few missed payments, FHA is more willing to look it over than conventional.)

Gifting

What if my parents or family member wants to give me a gift for my loan?



That's great! Now let's see how you can use it...



Easiest option: With a FHA loan, you only have to put 3.5% down. You can receive any amount of the down payment as a gift! For example, if the loan is for $100,000 and your down payment is going to be $3500, you can receive a gift of $2000 if you want, or any amount for that matter.



Now, if you are going with a conventional loan, you can still receive a gift, but there are a couple of rules. When going conventional, you must put down at the very least 5%. You as the buyer have to have this 5% to put down. You can receive any amount over this as a gift. So, if you have a loan for $100,000, and you have to put down $5000, your mom and dad can give you an extra $2000 as long as you have the $5000 to put down.



Another way to get a gift on a conventional loan is to get 20% down. When you put 20% down, a lender has a lot less risk in the transaction so they are more willing to let this happen. So, if you have a loan for $100,000, you can receive a gift of $20,000 to make up the entire 20%.



You cannot receive a gift from any parties involved in the transaction such as the seller, the realtor, the loan officer, etc. The seller can pay for some of the closing costs. I'll talk about that soon, but if you want to ask me now, just contact me.



It is easier to have the person giving the gift to write a check at closing. If they give you the gift before-hand, the lender has to verify where the funds are coming from, verify where the gift-giver has gotten them, etc. I know it is very exciting to see an extra $5,000 in your account, but if you want to expedite things, just have them write the check at the end.

What kind of mortgage is for you?

When deciding on what kind of mortgage is for you, you and your mortgage professional need to ask yourself a few questions:

1) What are my goals? (For instance, are you buying a first-time home that you will move out of in a few years? Are you planning on staying in this house for life?)
2) Where is my credit? (This can make a big difference when deciding to go conventional or FHA)
3) What is my budget? (Can you afford to take on a mortgage payment or is there going to be a huge payment shock for you?)
4) What kinds of investments are important to me? (Do you plan to prepay on your loan? Do you plan to build a portfolio of stocks? Do you want to buy this home and later down the line use it as an investment home?)
5) What do I want my payment to be? (If you do not want to pay mortgage insurance, you want to stick with a conventional with 20% down. Can you get a gift to get 20% down? What is your downpayment?)
6) How much do I have liquid right now to put down? (Are you going to have to get a gift for the entire downpayment? Will you have to have the seller pay closing costs?)


There are many more questions to ask yourself. These are all things to start thinking about when buying a home. Before you buy a home and obtain a mortgage, you need to learn how to manage your loan and the rest of your money. Make sure you are involving yourself with a mortgage professional who is concerned about you in the long run. You don't want to get stuck and become "house-poor."

I have been watching some sales-training videos. One thing this video is having me do is to create a personal mission statement. This statement may change over time, but for right now my personal mission statement is:

"I strive to be a profitable loan officer, but most importantly, I want to help my customers get the best loan to fit their needs so that they will want to refer customers to me."

I am now a lot more knowledgeable on loans. I know a lot more about conventional, and I'm learning more on FHA and VA. Soon I will hopefully be able to tell you all about every one of these loans.

I am working on learning how to easily take in a loan application. It is hard right now, but soon it will become second nature to me. I am practicing by role playing with co-workers so that when it comes to the real deal, I will be comfortable.

Another thing I have been practicing is how to look up rates. This is actually a lot of fun. I'm getting really excited, and I can't wait to start helping real people soon. I'm going to help out a friend of mine pretty soon, and my manager is going to help me through the process. Pretty exciting! :)

Learned how to take an application and everything that goes in it. We went through the essentials: Income, Assets, Liability and Property; we also went through the details. There is so much that goes into an approval, but the most important thing is making sure that you have a good credit history. It is so important to take care of your credit so that you can get approved for a loan.

We had a lady today that hasn't taken care of her credit, and she probably won't be able to get a loan because of it. We are going to do everything we can to help her, but there are no guarantees.

It's really hard when you want to help someone do something good for their life, and you may have to tell them no. This is going to be the hardest part of my job for sure.

I have recently been learning about the different types of loans available. I wasn't aware of what Mortgage Insurance actually is. If you don't have 20% to put down on a conventional loan, you have to pay mortgage insurance. This isn't to protect yourself. It is to protect the LENDER. So, it is wise to have a large downpayment.

What I am learning, though, is that you can get away without paying this insurance if you take out a second loan. This can help a person save on their monthly payments. Or the person can put that money back into the loan and save on interest.

This is all so new to me, but everything is making more sense everyday. Let me know if you have any questions. I am getting much better and understand a lot more.

Today I learned a lot about the different types of loans we have available. My company has the ability to approve what is called a PowerPlus loan. This is a great option for people who cannot come up with a 20% downpayment but do not want to pay for Private Mortgage Insurance. This can decrease your monthly mortgage payment saving you a lot of money each year!