Credit Denials

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

If your office looks anything like mine does, then you have a stack of files about 2 feet high that you have recently rejected. In this day of ultra conservative mortgage credit underwriting, I think all of us, as underwriters, are practicing prudence when making underwriting decisions these days and with no creative financing alternatives available, it seems that what would have been deemed sub-prime quality two years ago, is now FHA quality.

With that in mind, I thought it might be a good idea to discuss mortgage credit rejects where FHA was concerned as well as some of the misconceptions that surround them.

I would like to start by saying that as underwriters, we should make every effort possible to approve the mortgage applications submitted to us for underwriting. Our primary responsibility as DE underwriters is to assist HUD in expanding homeownership opportunities for Americans and other eligible individuals. So with this in mind, exhaust every available option for your borrowers before rejecting the case.

If however, it is just not feasible to approve the case or the borrower(s) present an undue risk to HUD from a mortgage insurance standpoint then by all means reject the case and provide the borrower with the property disclosure of such as per HUD’s guidelines. This disclosure would be an adverse action letter dated within 30 days of the actual mortgage credit reject which contains any and all necessary repository information.

In addition to providing the borrower with accurate and fair disclosure as to why the case has been rejected it is also the underwriter’s responsibility to complete the Mortgage Credit Analysis Worksheet with the reasons for the mortgage credit reject as well as complete the Mortgage Credit Reject information screens within FHA Connection. This information will remain in FHA Connection and be tied to both the property address as well as to the borrower using their Social Security number.

Any subsequent lender can add, delete or view borrower mortgage credit reject information on a non-endorsed case depending on their authorization in FHA connection. If a borrower, at a later date, would apply to another FHA approved lender for a mortgage, the mortgage credit reject would be referenced on any new attempted case number pull.

Now, for the misconception. It is believed by many DE underwriters that if a case was rejected by one DE underwriter on some previous date in the recent past, that another DE underwriter can not overturn the mortgage credit denial. This is untrue. FHA will allow another DE underwriter, if he or she is provided with new or updated information where the borrower is concerned that results in a significant material change in the case file, to overturn the rejection of another DE underwriter.

It is important that the approving DE underwriter, print the information contained in the mortgage credit reject screens in FHA connection and upon approval of the case, disclose on the Mortgage Credit Analysis what new information was provided and how it enabled the approving DE’s ability to approve the application. Comparative analysis between the old documentation and the new documentation is strongly encouraged. Also keep in mind that any previously rejected loan that are approved by another lender after rejection will undergo a very detailed underwriting review by HUD during any post closing technical review so be sure to address all of the reasons that from an underwriting standpoint that the case is now approvable under FHA guidelines. If the explanations make sense, then the case should be insured by HUD.

I will say that in the past, I have overturned mortgage credit rejects on limited occasion. Generally I will contact an underwriter at my local HOC and discuss the case before I overturn the reject just to get a second opinion. I will also tell you that in each instance, the case was insured by HUD. Keep in mind there are several reasons that a case could be rejected during underwriting including reasons that are not necessarily prohibited under FHA guidelines. Analyze the data provided in cases carefully to determine if the case is approvable and if it is, then by all means approve the loan if it is in the borrower’s best interest to do so. 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.