How Do I Get My Mortgage Approved: Fannie Mae's Desktop Underwriting System

In Mortgage Loans & Rates by Jo Garner4 Comments

Wouldn’t you agree that it is easier to win at a game when you know the rules?   Once you know the rules, you can plan your offensive and defensive strategies to get to the goal faster.  A mortgage originator’s game plan takes him to the goal of getting loans approved quicker and with the least amount of resistance.

Fannie Mae is a quasi-government agency that purchases mortgage loans from the primary market lenders.  Desktop Underwriter® is Fannie Mae’s electronic loan processing system that is programmed to underwrite loan applications using a risk based method that recognizes that a borrower’s strengths in one area can offset risk factors in other areas.

Desktop Underwriter® evaluates credit related factors such as credit payment history, delinquent accounts, public records and inquiries.  Non-credit related factors are also evaluated and include:

(1) Equity and loan-to-value

(2) Liquid reserves

(3) Debt-to-income ratio

(4) Loan purpose

(5) Loan type

(6) Loan term

(7) Property type

(8) Number of  borrowers

(9) Self-employed borrowers

(10) Occupancy.

The most important factors are equity, credit history and liquid reserves. Fannie Mae’s research proves that there is less likelihood of loan default when the borrower has made a higher down payment, managed their finances well and has a fair amount of money left in the bank account after closing.  For this reason, the borrower might not get a loan approval if she uses her savings to reduce her monthly bills instead of leaving  savings in the bank. In many cases it is better for the borrower to have a higher than normal income-to-debt ratio rather than using her funds to pay down excessive debts. Money left in the bank after closing carries a significant amount of weight in the underwriting evaluation.

Equity in the home or a large down payment on a home purchase lessens the risk to the lender unless the down payment was a gift from someone other an the borrower.  Borrowers who put hardly any of their own money into the transaction might be considered riskier.

The Desktop Underwriting® system considers the FICO score along with how long credit has been established, payment history, and public records. A borrower with a good credit history probably has a high FICO credit score.

(A high score can be 740 or above.)  An account that has been established for a long period of time is usually considered less risky than a newly established account.  Payment history has a significant impact on risk based evaluation and can cause problems with getting a loan approval if the borrower has made payments over 30 days late within the last 2 years.

If the delinquency is more recent, the loan is considered a higher risk.  Credit bureaus advise keeping credit card balances to less than 50% of the credit limit.  Overextended credit indicates a riskier borrower. Public records such as bankruptcies, foreclosures, judgements and liens indicate a higher risk and remain on the credit report longer.

Total debt-to-income is the amount of the monthly house payment, existing car loans, credit card minimum required payments, etc divided by gross monthly income.  The highest suggested debt ratio for a borrower is 36% of gross income.  However, Desktop Underwriter® has been known to approve loans with debt-to-income ratios as high as 50% or more if other factors such as liquid assets or high credit scores indicated a less risky borrower.

Borrower work status plays a role in the risk evaluation.  If the borrower is self- employed, the loan is considered riskier than if the borrower is salaried. Self employed borrowers tend to have wider fluctuations in cash flow which introduces an added layer of risk.

Loan term calculates into the risk equation because the system considers a 30-year fixed rate mortgage less risky than an adjustable rate mortgage.

But 15-year mortgages are considered less risky than either the 30-year fixed or the adjustable rate program.

Occupancy as a primary residence or second home present the least amount of risk.    Investment property represents the highest level of risk based on statistics.

Desktop Underwriter® takes the information on the loan application and credit report and evaluates the different layers of risks responding with an Approve, Refer or Refer With Caution (not approved loan) status. The object of the game is to lower the risk factors presented to the system when possible. If there are high risk factors to input, look for positive factors that can offset the risk.

Jo Garner, Mortgage Officer
Evolve Bank & Trust
www.MoneyShoppe.NET

Comments

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  2. FACING FORECLOSURE? FOLLOW THESE STEPS
    By: J. Garner Mortgage Loan Officer Evolve Bank and Trust (901) 482-0354 http://www.MoneyShoppe.NET

    He was clean-cut and dressed in business casual attire. Stepping purposely into his friend’s office and offering a firm handshake, one would think this 30-year old gentleman a successful entrepreneur about to seal a money-making deal. Once seated, he leaned forward to speak. His face tightened into a frown, betraying signs of worry and agitation. This seemingly confident businessman had lost his high paying job. He, his wife and four children were facing foreclosure of their home in a short time.

    Foreclosure properties have saturated the market. A great number of people behave like the ostrich, trying to hide their heads in the sand in hopes the whole situation will just go away. The first step in fending off foreclosure is to “face the music.” The problem is not going away, but the house is if definite steps are not taken today.

    Here are some steps you can take to fend off foreclosure:

    1. Don’t panic. TALK TO YOUR LENDER! Allow 2 to 3 hours of phone time in order to talk to all parties. Write down names and numbers and what was said in a notebook. Lenders have mortgage counselors that may be able to suggest a work-out plan for you to pay lesser payments for awhile until you are back on your feet. Be honest with them about your finances and budget. Follow through with what they tell you.

    2. Consult a HUD counseling agency. You can find them at http://www.hud.gov.

    3. Call a lawyer. Legal services are available for low-income families but they are usually very busy. You can find them at National Association of Consumer Advocates http://www.naca.net or Legal Services at http://www.lsc.gov.

    4. Never sign a legal agreement with anyone offering to save your house from foreclosure until you have consulted with your lender and your lawyer. Some investors offering to save your house ARE honest and may indeed be able to help you. However, seek qualified advice from an attorney. The attorney can steer you away from someone dishonest who intends to take your house and your equity in a scam deal.

    The gentleman in the above story was able to successfully fend off foreclosure by going to his lender for a work-out plan, allowing him to make lower payments for a short time until he could get another job. He sought help from friends, family and his church. His family tenaciously adhered to a tight budget. In order to meet the lower payments set out by his lender, he worked low-end jobs until he secured another high paying position.

    MORE HELP IS HERE: Due to the subprime lending shake up and generous funding from lending agencies, the Homeownership Preservation Foundation is offering free help and assistance to homeowners facing foreclosure or just financial problems in general. By dialing 1-888-995-HOPE, the homeowner will speak with a representative from Consumer Credit Counseling working in partnership with Credit Counseling Center. These organizations are available with free assistance for anyone facing foreclosure or other financial difficulty.

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