OK, OK I am on a Shakespeare kick, but it goes to the heart of what I am writing about. It is not unusual to hear the people in my office who have been involved in underwriting for years to say “that is not how it was in the old world”. What they mean by that is how underwriting was done before “Automated Underwriting Systems” like Fannie Mae’s (DU) and Freddy Mac’s (LP). These Automated Underwriting Systems have turned the way underwriting is done upside down. I am not going to go over all the things that have brought this about but I will cover three of them.
First, very few loans are manually underwritten any more. Once a Loan Officer submits a loan through DU or LP and gets an Approved/Eligible or Accept, the loan is basically approved. At that point all the Underwriter needs to do is verify the information on the application, make sure that every thing on the Automated Systems Feedback was followed, and that the house appraised. If all this checks out the loan is done and a Loan Commitment is issued. Underwriters had a real hard time with this new concept, because they were used to certain documentation being provided, that the Automated Systems don't always ask for. Example, DU and LP some times does not require that an appraisal be done on purchase or refi’s, they waive it. These changes were not well received in their world. A lot of Underwriters would still request the documentations, this created a little bit of turmoil between them and the Loan Officers, because now the Automated Underwriting Systems Feedback controlled a major part of the Loan.
The second major change is the “Ratios”. This leads to the title of my blog. Where are the ratios, they are through the roof. Underwriters used to follow a hard set rule that ratios would be no more than 28/36. Today if a Borrower has good credit scores, I said good, not great, but good credit scores I can get a conventional loan approved with a 65% total debt ratio. That is not just a little jump, it is a huge jump in the ratios. Even government loans like FHA can get approved with 41/50 ratio. This blew Underwriters minds, and it was very hard for them to accept this.
The third major change is the ability of a Loan Officer to give a Pre-Approval Letter with a very high degree of certainty that the Realtor has a qualified Borrower. I do not give any Pre-Approval Letters without first taking a full application, once I do that I run the information through DU or LP, if I get a response with an Approved/Eligible or Accept, I have a qualified Borrower if he or she has told me the truth.
It looks like “Automated Underwriting” is here to stay, and a computer has a major say in whether a loan gets approved or not. There are other changes that “Automated Underwriting” has brought about in the Lending Industries, but these standout the most to me. I hope it helps some of the Realtors on here understand the procedure today a little bit better, especially the ones that can remember the days of the 28/36 “Ratios”
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Info about the author:
George Souto is a Loan Officer who can assist you with all your FHA, CHFA, and Conventional mortgage needs in Connecticut. George resides in Middlesex County which includes Middletown, Middlefield, Durham, Cromwell, Portland, Higganum, Haddam, East Haddam, Chester, Deep River, and Essex. George can be contacted at (860) 573-1308 or gsouto@mccuemortgage.com
For someone like me growing up in the business with ratios, ratios, ratios it has been hard for me to accept that these high ratios OK'd by AU are for the good. But I guess, so far so good. MOst of the buyers that I speak with will still look and say"I don't want a payment that high" and will scale back.
Different world !
I got into it after that. I get a kick out of the stories and experiences that Phil has share with me sometimes.
Now what AU says is the rule, with very few exception, CHFA being one of them.
George,
You should plan to come down to New London one of these days and have lunch with Phil and I. That would be great fun!
Yes it would, I would love that, but hopefully you will come to the luncheon that we are doing at the Convention Center also.
By the way what do you think the ods would be of Phil paying for the Lunch?
Good questions Jeff, no offence taken. On my regular conventional 30 year fixed with credit scores 650 or higher with a clean history no charge offs, collections or bankruptcies I have gotten an Approved/Eligible with 65% back ratio from DU with 5% down and maybe one to two months reserves. My Treasury ARM 660 or higher same thing good history, no charge offs, collections, or bankruptcies, with 10% down, I have gotten Approved/Eligible with 65% back ratio from DU. Hope you are ready for this one, no money down 100% financing, only $500 out of pocket towards closing costs, the rest can come from the seller, 650 or higher, again good history, no charge offs, collections, or bankruptcies 65% back ratio with very little in reserves. But if it does ask for reserves, 3 months max on a single family. Interest rates in the mid 7's right now on the last one.
I get these feed backs all the time. I think it is crazy for a borrower to do this, and I warn them, but if DU gives me an Approved/Eligible then it is Fannie Mae that is on the hook for it.
I usually will asked them if they like eating, and being able to drive their car, because there isn't going to be much left over for that. But some don't want to hear it, they just want the house. I warn them and give them as much info as possible, but in the end it is their decision.
George... I know DU has changed... but most of my buyers are the clean 620 and above and have the income or money..... or they are subprime. I do have the middle people that I do as Alt-A deals..... but in regards to ratios... if my clients have high ratios, it's usually the 70% or higher... lol I have gotten FHA ratios to 63% before.
Anyhow...thanks
Jeff how in the world are you getting 63% on an FHA, I can't get higher that 50% on FHA, you must have a Genie in that computer...LOL
WHAT ABOUT SEEMINGLY LOW DTI RATIOS...NOT APPROVED?
I too have enjoyed the files with high ratios and relatively low assets.
But recently I've seen a swing in the other direction as well...
DU Level II for the following:
- 732 Fico
- 25% DTI
- 30 Months Reserves
- Rate/Term Refinance
- 30-Yr Fixed Program
- No Derogatory Credit
- 5 Years of Mortgage history
- Reducing payment $75/month
Only explanation was that current mortgage was only reporting 2 months.
Borrower puchased in 7/06 and was looking to do rate/term refinance.
I've had several files that fit this "short mortgage history reporting" profile.
Fortunately we were able to place them into other NON-DU programs.
Interested to know if others are experiencing this as well...
George hows it going ?
I do the same thing that you do, i dont give out preapproval letters. I have the prospective client give me all of their income documentation up front. I then have the staff underwriter look at it then i tell the client if they can obtain financing or if the purchase is within their affordability factor (DTI) .
Eddy
George,
Great informational post for those who may not know about or understand Automated Underwriting Systems (AUS). I think that once underwriters got accustomed to AUS they really have come to like it. It takes a big monkey off their back particularily when it comes to one of those "Tweener Loans" and granting exceptions that are outside the box.
Me....I have come to love it as it is a major resource or tool to work the scenarios and what ifs to make a deal come together. It's great to be able to issue a pre-approval with an abundance of confidence. As a matter of fact, I had to back off from pre-judging a lot of loans. AUS have blown my mind on favorable findings many times.
P.S. I got one approved recently-100% financing, 64% back end ratio and no reserves.
George,
I agree and this is a part of what I preach as part if my Three Rules for my clients.
George we have that advantage over others that our underwriters and staff are in house. This teamwork helps close loan faster!!!
Eddy
James, with all the changes in the Industry lately they have began to tighten up a little again, but they are still a lot different than the days of manual underwriting. Many more people can now purchase homes because of automated underwriting and the higher ratio's, but sometimes they allow people to get a little over their heads.
Thank you for stopping by and commenting.
I agree and also believe that automated underwriting will continue to have major role in residential mortgage lending decisions. That being said, it can not replace is the knowledge and expertize of the loan officers and underwriters. We all know that it takes little bit more than to enter borrower's information in the system, collect documents and run it..All those little things like making sure that income is computed in a proper way (YTD vs wage; overtime, bonuses,self employed or not, tax returns and schedules, etc...), verifying assets as sourced & seasoned, looking for overdrafts, 401-K,s stocks,cash deposits,gifts, re-checking deferred liabilities and so many other small but important details that make human role irreplaceable.
We all know that AU finding and approval is as good as the validity of information and data entered there. In that sense, I think that continuing education for loan officers, processors and especially underwriters is of the crucial importance for the good loan for any borrower.
Gary, that all changed, and I am not sure that it was completely for the better.
Senaid, you are right about the need to still know all those things. We also need to know why sometimes you get an Approved/Eligible and sometimes you don't when the two loans are almost the same. You need to know what to look for so that you can see if the Borrower is able to make the necessary adjustments. AU is not going to tell you what to do, that knowledge only comes with training and knowledge. The human factor as you said is still a major part of the Mortgage Industry.