Why We Underwrite Loans

Written By: Bonnie Wilt-Hild, Op-Ed Writer

I know, it sound pretty elementary, we underwrite to see if the borrower qualifies, it’s that simple right? Actually it’s not that simple nor is the task of underwriting a basic exercise in calculating ratio’s, cash to close and making sure the borrower’s credit score is sufficient to meet investor criteria. Each month I teach several students the fine art of FHA and VA underwriting. During these training sessions we go over guidelines with regard to ratio and credit requirements, discuss assets and of course how to complete the submission documents as well as why a case number is important. However there is always one or two students that stand out because they will ask what sounds like a simple question but in all actually it a pretty complicated one, the question being “So where do we start, how do we go about underwriting an FHA loan?” Sometimes I think maybe the process of underwriting is eluding them but other times I think they have a handle on the basic fundamentals and processes, it’s the big picture however, that they are questioning.

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The much larger picture where underwriting is concerned is the information, assumptions and rationalizations that are not carved in stone as a guideline but are as equally important and unfortunately, this is stuff you don’t find in product manuals, investor matrix information or even the 4155. It’s the nature of underwriting, not how we do it but why we do it. Many times during training sessions, particular DE training, I will discuss with my students certain scenarios and who or why not a loan may be approvable. This involves conversations about compensating factors and what they may or may not indicate, situations when these compensating factors carry significant weight and when they do not and finally why it all matters. These assumptions and rationalizations are the very thing that allows an underwriter to adequately assess risk based on the particular case being underwritten and honestly, an underwriter needs to have a real feel for it. Just calculating ratio’s, income or assets to close isn’t nearly enough to determine if a loan is an acceptable risk. An underwriter must determine the stability of the income which may involve many variables, such as employment by family, declining self employment, income derived from unconventional sources and so on. Yes the case must fall in line where the ratio is concerned but how the income is developed and the overall stability of it is just as important as dividing proposed monthly housing expense by gross monthly income. Funds for closing is another one because just demonstrating that the borrower can bring a certified check to closing means nothing when considering the borrowers long term ability to afford the mortgage they are applying for. The bank statements provided by the borrowers should give some indication as to the borrowers spending versus savings habits which will have a bearing on it or not the borrower will be able to afford the increase in housing expense. The bank statements may also document undisclosed debt, payroll loans and the like indicating the borrowers inability to manage their income effectively from pay check to paycheck as well as a wealth of other things.

Need FHA Training? CLICK HERE: http://www.FHA-Classes.org

In closing I would like to answer that question which many of my students seem to ask which is again, “Where do I start?” Quite simply start by asking yourself this question, “Does this borrower demonstrate the financial ability and stability required to maintain homeownership as well as a meet all other underwriting criteria?” Once you have asked yourself that, read between the lines because every page in the file will give you some insight as to the answer to that question.

About The Author

Bonnie Wilt-Hild - As an op-ed writer, Bonnie has held many mortgage underwriting positions, including Senior FHA DE Underwriter for a major lending institution. With over 25+ years of senior-level FHA/VA Government underwriting experience, Bonnie is considered the "Queen of FHA Loans".

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.