Loan Guidelines Facts Need to Know Pleasanton/Dublin/Hayward/Fremont

The new loan underwriting world - this promises to have a huge impact for REALTORS® because the field of qualified buyers is shrinking further due to many underwriting changes. Due to the ongoing mortgage meltdown the last few months have seen a dramatic change in how ALL loans (FHA, VA, FNMA, FREDDIE MAC and JUMBO) are being underwritten. It goes without saying that everything is FULL DOCUMENTATION, however, that is just the tip of the iceberg.

The investors who buy the loans we originate are demanding details and documentation never before asked for in the long history of the mortgage business. If your clients haven't already expressed dismay over what their loan officer is asking for, they will in 2010. Here are some potential pitfalls we are seeing in loan files that can cause a "decline" and some of the increasing documentation that is often being asked for by underwriters:

Potential Pitfalls:

1. Declining income - this is a giant red flag in today's world because it may signal that the company may be soon going out of business or that our client may soon be laid off, or that the client's income may decline further. In either case, often only the current lower income will be considered - no matter how much the client has made previously unless proper documentation is obtained to show that these three scenarios won't happen.

2. Job Gaps - lenders are extremely wary when a borrower has had a gap in employment of more than two months. Such a gap may require that the borrower be on his/her current job for an additional 6 months or longer before being approved for a loan, especially if the gap is recent. We have to adequately explain all employment gaps in the last 2 years.

3. 4506T's - All loans now require that the lender order a 4506T (buyer's tax transcripts) from the Internal Revenue Service for 1 - 2 years, even on salaried individuals. This is a fraud prevention requirement, but it does cause trouble in some cases. Whatever shows on the 4506T is what the lender must go by. The two items most likely to cause an underwriting issue are UNREIMBURSED BUSINESS EXPENSES AND BUSINESS LOSSES. They must be deducted directly from the borrower's income. This is causing more than a few loans to be declined for insufficient income.

4. Tougher debt to income ratio requirements. The new version of Desktop Underwriter (through which most loans are analyzed) has a max approval ratio of 45% (% of debt to borrower's income). If the borrower has great compensating factors (such as residual income, low payment shock, limited use of debt, 2 or more months of reserves, good job tenure, high credit scores, income earned but not used to qualify etc.) an approval to 50% may be possible. A borrower with high ratios must have at least 3 of these, and the loan must make sense. For most borrowers 45% will be max. In pre-vious versions of DU we have seen numerous approvals granted into the 50's and 60's, especially on low loan to value loans. No more.

5. Credit - lots of changes here too:

• Max 620 credit scores on most loans
• 720 to 740 credit scores required on conventional loans above 80% by MI companies
• All inquiries that show on a borrower's credit require a written explanation
• Disputes on credit reports mean that the loan must be manually underwritten by an underwriter. A DU approval is not sufficient.
• If a borrower has one mortgage late in the last 12 months they can't get a loan in most cases.
• Short sale and foreclosures - they are generally classified the same (except for FHA) and require a 3 - 5 year wait before the borrower can qualify for another loan. FHA will approve a borrower who has had a short sale as long as they had no late mortgage payments prior to the short sale and that there is no deficiency judgment against them.

6. Bank Deposits - a loan officer must be a detective today when it comes to collecting and reading bank statements. 2 months bank statements are required even if we have a verification of deposit. All sizeable (size is at the underwriter's discretion) deposits require an explanation and proof of source. Any NOTICE OF INSUFFICIENT FUNDS on a borrower's bank statements are a big negative factor.

7. The appraisal - many REALTORS® have either lost transactions in 2009 or have had their sellers take less than they thought they were going to get because of the HVCC rules that require lenders to order appraisals through Appraisal Management Companies (AMC's). This does not have to happen in all cases if the loan is done by Cherry Creek.

In the 2010 loan qualifying arena it could be said with some accuracy that a borrower is guilty until proven innocent (or unapprovable until proven approvable). This is unlikely to change within the foreseeable future as investor's losses from foreclosures and short sales continue unabated.

I can help you with some of these things. I understand how to help know before we get to the closing table if a borrower can purchase. Don't get to removing contingencies to find out there is an issue.