Making the Most of Underwriting Guidelines

Written By: Frankie Lacy

Automated Underwriting System (AUS) findings have become more sophisticated as the mortgage industry has turned its focus to lending quality, transparency, and regulatory compliance. As a result, some are left wondering, do I still need to look things up in my guidelines? The answer is, YES!

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Now, more than ever, a heavy dependence on underwriting guidelines is appropriate for mortgage professionals of every kind. Guidelines often have a more in-depth explanation of lending topics and include links to other related topics. Guidelines give us a firm foundation for the documentation conditions we should add to our approvals.
My suggestion is to use the following system for maximizing all the available guideline resources:

I. Carefully review the AUS findings report on the loan. Take note of the requirements for credit, income, assets, and appraisal. As you underwrite the loan, determine if the AUS findings are valid.
EXAMPLE: If the AUS findings are conditioning for a paystub and W2 only, but you realize in your review of the file that the borrower has social security income; the findings report must be updated to reflect this income source.

II. Once the AUS findings have been validated and you are sure you have met or conditioned for each appropriate item, it’s time to consult the investor overlay guidelines. If you work for an organization that sells loans to investors, this is a critical step in your process. Most investors have overlay matrices that outline the rules that they apply over and above agency (Fannie, Freddie, FHA, VA, Rural Housing Development). Consult these matrices to determine if you need to apply a more stringent condition.
EXAMPLE: If the borrower is purchasing an investment or second home, or they are converting their departure residence into an investment or second home, most investors have a reserve requirement over and above agency rules.

III. The final step applies to conventional loans where mortgage insurance (MI) is required due to the LTV exceeding 80%. Similarly to investors, MI companies have overlays. Consult the MI overlays to determine credit score, reserve, and debt ratio requirements that may be more stringent than agency or investor requirements.
The rule of thumb is that we always underwrite to the most stringent guideline. So in the case of reserves; the MI company may require two months reserves because of a higher LTV. However, the investor may require six months reserves on the subject property and the departure residence because the borrower is retaining the departure residence. You would issue your underwriting approval using the six month rule as your condition.

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Finally, you can always consult the guideline whenever you encounter a loan scenario that is unfamiliar to you. For instance, at my current employer, we do not lend on many manufactured homes. Therefore, whenever I get a manufactured home, I pull the agency and investor guidelines and study them carefully before rendering my loan decision. At no time in your underwriting career is it considered bad form to consult the guideline. Guidelines are your ace in the hole when navigating the ever-changing landscape of residential mortgage lending.


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.


Opinion-Editorial (Op-Ed) Disclaimer For NAMP® Library Articles: The views and opinions expressed in the NAMP® Library articles are those of the authors and do not necessarily reflect any official NAMP® policy or position. Examples of analysis performed within this article are only examples. They should not be utilized in real-world application as they are based only on very limited and dated open source information. Assumptions made within the analysis are not reflective of the position of NAMP®. Nothing contained in this article should be considered legal advice.