Homeownership is a beautiful thing, but the path to getting there is not always a smooth one. Finding, negotiating, and financing the purchase of real estate is complicated and there will be some “bumps in the road.”
If your first attempt at financing resulted in a conditional approval or flat-out denial, you may be wondering if underwriters can make exceptions. The short answer is: yes, but exceptions are not the norm. A loan application involves many moving parts and the underwriter’s decision is based on more than credit score alone. Multiple stakeholders have an interest in every mortgage, including the secondary market investor that intends to purchase the loan as a single asset or part of a loan pool.
What can be done if your first attempt at home financing fell flat? To answer this question, it helps to review basic underwriting guidelines.
Underwriting: The Basics
The basics of underwriting come down to four C’s: Credit, Capacity, Collateral, and Character. Each one tells a piece of your story and helps the underwriter to determine whether your risk level is good, bad, or somewhere in between.
Credit: Your credit score is an important risk factor. Credit scores are useful for an underwriter, as are the many other details on your credit report. Buyers who want a low-interest rate know that being proactive pays. If possible, review your report before applying for a mortgage. This will give you an opportunity to correct any mistakes and assess your own habits. To obtain a free copy of your report, go to www.annualcreditreport.com. The free copy does not include your credit score but does include everything else such as payment history, open accounts, balances, public records, and credit inquiries. Most FHA loan products require a credit score of at least 580, while Conventional requirements are higher.
Capacity: Most borrowers will be asked to show proof of income. If you are taking on a new monthly payment, then you will need to show the underwriter that you have the means to pay it back. Income documentation may include W-2 or 1099 forms and paycheck stubs. Proof of direct deposits and/or bank statements showing passive income might also be required. The underwriter will consider your debt-to-income ratio (DTI). This is expressed as a percentage. If your proposed housing payment will represent more than 30% of your income, your DTI might be considered too high, and the loan amount may need to be reduced.
Collateral: When it comes to mortgages, the collateral is the house itself. This is why lenders require an appraisal from a licensed professional. The underwriter needs to know if the property has enough value to support the requested loan amount. If a borrower defaults (i.e., quits paying their mortgage) the lender can exercise the right to foreclose on the collateral and recover some or all of their loss.
Character: How have you handled responsibility in the past? Do you typically pay things on schedule? Are there any previous judgments, liens, or bankruptcies on your record? Time helps to heal these financial wounds, but it is a slow recovery. These and other credit blemishes may still show up on your credit report for years after you have settled them. A history of poor financial character could cause your lender to decline your loan request or to offer financing at a higher interest rate.
If these parameters seem too tight, keep in mind that the less-stringent underwriting guidelines of the early 2000s contributed to the foreclosure crisis of 2008. The industry has learned from previous practices.
Why Would an Underwriter Deny a Loan?
Put simply, an underwriter would deny a loan if making the loan is not a good risk for the lender. The underwriter has to answer to other parties as well. These include the secondary lender (a bigger bank that purchases loans after they close), loan insurer, applicable banking oversight departments, and the government-sponsored enterprise (GSE) that guarantees the loan if it is a Conventional loan.
Basic guidelines are different for different products. Conventional products are guaranteed by GSE’s such as the Federal National Mortgage Association (Fannie Mae), FHA loans are insured by the United States Department of Housing (HUD), and VA loans are insured by the United States Department of Veterans Affairs. Exotic, non-conforming, and in-house products also exist and are underwritten to their own guidelines. Sometimes, private mortgage insurance is required. Guidelines are different for purchases versus refinances, Jumbo-sized loans, loans for self-employed borrowers, and so on.
Exceptions Do Happen
Exceptions do happen, but only in cases where one or more of the “Four C’s” are sufficient to compensate for the “C” that is lacking. For example, a borrower’s credit score falls slightly below the minimum required by the loan product; however, his or her DTI is below 20% and the amount of the mortgage payment is lower than the amount that the borrower currently pays monthly rent. In this case, the underwriter might determine that the borrower’s capacity to repay compensates for the below-threshold credit score.
Fair Housing Considerations
According to HUD, “The Fair Housing Act makes it illegal to discriminate against someone because of race, color, religion, sex (including gender, gender identity, sexual orientation, and sexual harassment), familial status, national origin or disability at any stage of the mortgage process, including Approvals and denials…”.
If a mortgage underwriter is concerned that a denial could result in a violation of the Fair Housing Act, said underwriter could make an exception to the standard guidelines.
Can a Loan Officer Influence an Underwriter?
Your loan officer has your best interests in mind, but even so, he or she is not likely to attempt to influence the underwriter. If a loan does not meet product guidelines, the quickest path to approval is for the borrower to conform. This could mean paying-off debts, taking several months off from the home search to save more money, or reducing the loan amount. Also, the loan officer cannot request a different underwriter as a result of a loan denial.
Can A Lender Override an Underwriter?
A lender override is highly unlikely. However, the lender could seek an alternative product and/or advise the borrower on how to qualify in the future. The lender could also request re-underwriting of the application if new information or an extenuating circumstance is present. If you would like more detailed advice on how to put yourself in the best position for approval, Contact Ruoff Mortgage. Ruoff’s experienced loan team looks forward to working with you!