Best Practices: Reviewing Guidelines

Written By: Frankie Lacy

In the correspondent/broker world, where we do not have the benefit of servicing our own loans, it is critical to hone your guideline reviewing skills. Correspondent and broker lenders have up to three sets of guidelines that should be reviewed when underwriting and processing a loan: Agency, Investor, and Insurer / Guarantor. As a result, when underwriting a file, I take the following steps:

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1. Review the Automated Underwriting System (AUS) findings. This is a great place to start for an idea of the conditions that must be met on the file. However, it is important to remember that the findings are just the beginning.

2. Review the seller/servicer guide for the Agency that corresponds with my findings (Fannie Mae for DU and Freddie Mac for LP). I use the advanced search option to find guidelines that apply to my loan. For example; I have a borrower that earns notes receivable income, and is getting a gift of $5,000 from his parents. I will look up each of these income/asset types in Fannie Mae’s guide to determine what I will need to meet Agency’s requirements.

3. From there, I will go out to my Investor’s guidelines to determine what overlays they might have. Overlays are guidelines that are more conservative than Agency guidelines. For instance, if the borrower has had a short sale, DU will condition for at least 2 year’s seasoning before the borrower is eligible for new financing. However, the investor overlays often require 3 to 4 year’s seasoning before they will purchase the loan.

4. Finally, I will go out to the Insurer’s guidelines to determine if they have any overlays above and beyond Agency and Investor rules. One area where this is particularly applicable is with reserves. Often, DU or the Investor may not have any reserve requirement for primary residence purchases. Conversely, Private Mortgage Insurance (PMI) companies might require a minimum of 2 months reserves for the higher LTV’s (95% and above).

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The best practice for reviewing guidelines is to underwrite to the most conservative rule for the loan scenario. A great example of this is work completion escrows (AKA escrow holdbacks for repairs). Freddie Mac guidelines require the repairs to be completed within 180 days of closing, but some Investors call for the work to be completed within 90 days. Freddie Mac says the price for work to be completed may not exceed 10% of the as-is value. Investor guides require a $10,000 maximum regardless of value. As a result of these Investor overlays, my escrow completion condition would say: “Work to be completed within 90 days of closing. Work completion escrow amount not to exceed the lesser of 10% of as-is value OR $10,000.”

In a world where multi-tasking is second nature and the month-end clock is always ticking, it is easy to hurry through guideline review. But, rushing this process can be a costly mistake. Guidelines are the tools we use to plan for every contingency that would cause a loan to be unprofitable. Thorough guideline review is vital for the health of your company and the mortgage industry as a whole.


About The Author

Frankie Lacy - As an active NAMP® member and a NAMU®-CMMU designee, Ms. Frankie Lacy is a 13-year mortgage industry veteran with extensive conventional mortgage underwriting experience. Frankie is also a mortgage instructor for Mortgage Underwriter University (www.MortgageUnderwriter.org). Topics of Frankie's expertise include: Fannie Mae, Freddie Mac, USDA Rural Housing, underwriting to investor overlays, self-employed borrowers, personal and business tax return analysis, rental income, condos/co-ops/PUDs, and more. Frankie is a Davenport University graduate with a degree in Business Administration. If you're interested in becoming a writer for NAMP®, please email us at: contact@mortgageprocessor.org.

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