The Principals of Mortgage Underwriting

Written By: Bonnie Wilt-Hild
Senior DE Underwriter & NAMP Instructor

As a normal course of business, I regularly have conservations with originators, mortgage brokers and processors regarding application scenarios. The case is usually less than perfect and more often than not, the originator is looking for a way to get it done. Before I get the phone call and/or subsequent visit from the originator, they have usually assessed the case and determined that either the credit score is less than 600 which case a refer in the AUS used or the borrowers ratios exceed guidelines.

It is usually at this point when I get the phone call and the Loan Originator begins to tell me about the deal. When they describe what they have it usually goes something like this, “ I have a cash out refinance on my desk that got referred in DU. The borrowers credit score is 592 and after we pay off some debt at closing, their DTI will be about 47%. Do you think we can get this done”. That’s it, no explanation for the derogatory credit, no explanation as to if the transaction will improve the borrowers financial position and so on.

I can’t tell you how often I get these kinds of phone calls and I just want to take this opportunity to remind everyone that underwriting is not just simply LTV’s, ratio’s and credit scores. These are simply guidelines, a definition of words if you will. The basic principals of mortgage credit underwriting provide for a complete assessment of the borrowers overall financial situation in an attempt to determine not only ability to repay debt, willingness to repay debt but also the assessment of collateral.

An underwriter can not assess all of these factors by simply determining a LTV or calculating a ratio and a credit score might reflect the borrowers current credit history but has no bearing at all on the borrowers overall track record where maintaining an overall acceptable credit history is concerned.

As we underwrite our cases, we need to remember to not limit ourselves to the reflection of the case alone, and by that I mean, small factors that demonstrate that the loan meets product guidelines. Underwriting the case requires far more than that and responsibility in underwriting decision is a returning trend. It’s important to remember that as we validate our findings as provided by AUS, that we also assess the overall financial strength of the borrower, including past financial performance as well anticipated future performance.

A current credit score may be considered when considering the borrowers present performance where debt accumulation and repayment is concerned, but the borrowers overall credit performance cannot be truly assessed without determining the length of the borrowers credit history, overall long term performance and the borrowers propensity to amass debt. For example a borrower that has completed 3 cash out refinance transaction in the most recent 5 years may present a considerable risk particularly if they have used most of their equity over that period of time. It is also quite possible that this particular borrower could have an excellent credit score as debts have been paid timely as they were amassed and simply paid in full through multiple refinances before they became more than the borrower could handle.

In short, this is a borrower who may demonstrate a timely repayment history however their excessive spending and inability to manage their financing without incurring significant debt is a concern when considering the long term financial performance of the borrower.

As with examining the borrower’s credit, HTI and DIT ratios alone do not necessarily signify or guarantee the borrowers ability to repay debt. An example of this might be a borrower who based on their present employment makes a monthly income that is sufficient to demonstrate an acceptable DIT/HTI. However, if the borrowers overall employment history is unacceptable due to multiple job changes and significant gaps then it would be prudent to place more of an underwriting emphasis on the borrowers overall employment history than current monthly income.

Collateral issues to can be very deceiving. A property located in a declining market that has been compared to comparable sales that are 6-8 months old can give an unrealistic or inflated value for the collateral. Current listings are not particularly helpful either as they to can demonstrate a property seller’s unrealistic expectation as to what their property is presently worth. My home is worth $1,000,000 to me, the wall paper rocks, but my neighbor wouldn’t give me anymore then $300,000 and that’s if I remove the wall paper.

As underwriters, remember to assess the overall case file. As a rule, when I open a file and begin to underwrite it, the information that I NEVER view first is the HTI/DTI, LTV or Credit Scores. Those I look at last to make sure that the case meets investor/FHA/Conv guidelines. That is the only time I consider them. As for the rest of the case, I use all of the information in the file to determine that ultimately I will have a performing asset. As always, happy underwriting.

About the Writer. As an NAMP staff writer, Bonnie serves as a senior instructor for FHA Online University as well maintains a full-time job as Senior DE Underwriter for a major banking institution. If you would like to become a writer for NAMP, please email us at: blog@mortgageprocessor.org.