The Three “C”s

About The Author

Theresa Furzland - As an NAMP® staff writer, Theresa serves as an instructor for Loan Processor University (http://www.LoanProcessorTraining.org). Theresa has 25+ years of experience ranging from origination, processing, closing and post closing. She is currently a producing Branch Manager for LendSmart Mortgage, LLC and own and operate Willow Wood Mortgage Services, Inc. If you're interested in becoming a writer for NAMP®, please email us at: blog@mortgageprocessor.org.

CREDIT CAPACITY COLLATERAL

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When an underwriter is presented with a loan request package, their job is to determine whether the potential borrower will pay back the loan or not. There are many tools available to today’s underwriter and most of the determination is handled by complex computer programs that are designed to weigh the risk factors and make a decision based on impartial means.

The benefits of having this important decision making process is too fantastic to ignore, however as so often happens in our automated world, it is easy to forget the basics. These basics are not forgotten by the computers, they are the building blocks of every model designed. With credit scores and instant “pre approval” automated responses it is easy for us humans to lose track of these basics, so here is a short “Underwriting 101”

CREDIT: This is a review of the customers past history in meeting their obligations. Not only have they paid their accounts on time, but how long have they had a history. This is one part of the automated system that has the highest potential for inaccuracy. With the emphasis on credit scores and the amount of incorrect information, fraud, and customer ignorance of their rights and responsibilities regarding their credit there is a large margin of errors in credit reports. Customers need to be educated to “watch dog” their credit and lenders need to allow customers the opportunity to “prove” themselves credit worthy when there are extenuating circumstances that can be documented.

CAPACITY: Does the potential customer have the ability to repay the loan? This includes sources and likelihood of continuance of income, current level of debt load in comparison to new loan, amount of assets and equity in property.

COLLATERAL: Is the property taken as security of sufficient value? The appraisal report is reviewed manually and generally the lender will also order an AVM (automated valuation model) report.

Each of these factors by themselves does not make or break the decision for a lender to make a loan. The balance between the factors will determine the overall decision. For example, a borrower with substantial equity in the home, excellent credit and large savings reserves may be able to qualify at a slightly higher payment than a customer lacking these other “compensating factors”.

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This is the main reason that it is important to remember that no one situation can be summed up by a three digit number. The overall situation of the potential buyer must be diligently reviewed by an underwriter and the customer with the best balance of these three indicators will receive the best loan terms.

SOURCE: Published by NAMP® Publishing Group, a division of the National Association of Mortgage Processors (NAMP) (http://www.mortgageprocessor.org)