Written By: Bonnie Wilt-Hild
As underwriters, many of us spend our days reviewing guidelines, interpreting guidelines, answering questions with regard to guidelines and applying the now never ending overlays from our investors with regard to guidelines. Underwriting guidelines apply to every loan product and differ depending on which type of product you are underwriting however there are many common sense areas that apply to underwriting that are not addressed in handbooks. For many lenders, adhering to written guidelines is the rule but for many of us, taking a bit a further to address those other common sense areas seems to be the path to perfect due diligence. Perfect due diligence may sound ridiculous in a market already overburdened with excessive credit and appraisal overlays but when you consider the potential for buy backs and indemnification these days, not to mention HUD sanctions, it is my opinion that you can never be too careful.
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Let’s talk income for minute which in my opinion give a wonderful example where further due diligence might come into play. It’s common knowledge that a criterion for documenting income includes paystubs, W-2 wage statements as well as verification of employment. If a borrower is self employed then we collect that borrowers tax returns for the most recent two tax years, year to date profit and loss statements and even possibly paystubs or perhaps a CPA letter. When covering overlays these days we typically order IRS tax transcripts for the most recent two tax years regardless of the borrowers employment status as either self employed or W-2 employee and this is where a lender might seek further due diligence depending on the information contained in the transcripts. When reviewing IRS tax transcripts underwriters try to determine several things aside from if the income documentation provided by the borrower is supported by their tax filings. During the review, we may look to see if the borrower has been filing a schedule C for part time self employment purposes that may have resulted in annual losses or perhaps claimed unreimbursed employee expenses but how many of you look to determine if there were taxes owed by the borrower for the prior to two tax years and if so, condition for evidence that they have been paid? If you haven’t been then you should start. I can’t tell how many times that I have determined that the borrowers have an payment plan set up with the IRS which calls for monthly payments greater than $500.00 which, as you can well imagine, as a serious impact on the borrowers ratio’s and ability to repay. Another great example is ground rents.
In some areas of the country ground rents are prevalent as is the case for the state in which I reside. In cases where a property is subject to a ground the appraiser will typically note this information on page 1 of the URAR. I am sure that all of you then include this payment in the proposed monthly housing expense and review criteria as set forth in the guidelines such as determining that the ground lease is acceptable, 99 years, renewable etc. But how many of you request that the appraiser provide a leasehold value in addition to the fee simple value. Believe it or not, considering that in most cases a ground rent is capitalized at 6% for redemption purposes which works out to about $2000 for a $120.00 annual ground rent, this information is extremely relevant in determining fair market and in terms of value, should be the value used for underwriting purposes. Bottom line is, with that active ground the property is really valued at $2,000 less than the same property being conveyed in fee simple.
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The above examples are just of few of the many items that we as underwriters should be looking for to perform due diligence by the highest standards because as you can see, in many cases these items may very well effect the borrower’s ability to repay the mortgage debt or even the collateral value of the property securing the debt. Remember everyone, guidelines are exactly as they imply, guides and tools to help us achieve our objectives with regard to sound underwriting practices but they are not the end all, due diligence is always going to take it a step further. Have a great week.
About The Author
Bonnie Wilt-Hild - As an NAMP® staff writer, Bonnie currently serves as a senior instructor for FHA Online University (www.FHA-Classes.org) as well maintains a full-time mortgage underwriting position as the 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". If you're interested in becoming a writer for NAMP®, please email us at: contact@mortgageprocessor.org.
