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
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