The Perfect Test Case
I have had several conversations’ regarding this subject matter and that again being the submission of the perfect test case to HUD. Quite frankly, the mortgage industry as a whole really believes that the only cases that are to be submitted to HUD for test case purposes are perfect, plain vanilla files that require little if any underwriting ability to assess except of course for the one mortgage credit reject that they will consider and this is far from accurate. Believe it or not, the underwriters at HUD are hardly interested if or not you can complete the 92900LT or Firm commitment, what they really want to know is if your institution and the Direct Endorsement underwriters it employs’ know how to fairly and accurately assess mortgage credit risk for HUD purposes.
To demonstrate this we all need to think about the mix of cases HUD requires in order to complete the test cases phase, these being a combination of five approve/eligible’s or streamline cases and one mortgage credit reject that has been completely processed and includes an appraisal and then 10 manually underwriting cases. Now the 10 manually underwritten cases also need to include Total Scorecard findings, you just simply cannot utilize any documentation waivers, which quite frankly in today’s market is a bad idea anyway. It’s the 10 manually underwritten cases where you should be demonstrating to HUD that you actually understand the principals of mortgage credit analysis, assessing risk as well as documentation standards as required by HUD.
Now I am not saying that you should work to approve loans that do not meet credit and collateral criteria in the first place because you shouldn’t do this regardless of test case phase, but borrowers who have demonstrated overall willingness and capacity to repay that may be marginal due to some unforeseen extenuating circumstance, the borrower that you would approve were you not in test cases, is exactly the case that you should fully document and forward to HUD for test case purposes.
While in test case phase for one particular lender I was employed by, I came across a case that actually received a Refer through Total Scorecard. This particular borrower had gone through a rather nasty divorce and as a result of really lofty child support payments, he was unable to continue to pay in a timely manner most of his revolving accounts as well as the rent on the apartment that he was now renting. In this particular case, the borrower paid his rent on time and had set up payment arrangement with all of the creditors which had become delinquent and had paid off all but 1 before he applied for the mortgage. The property that he was purchasing was conservatively priced and the funds for closing were funds that he had saved. He was able to document for me with cancelled checks for an 18 month period the monthly payment he was making on the last revolving account in the amount of $100.00 also demonstrating no late payments clearly evidencing his willingness to repay debts.
His ratio’s as a result of the purchase transaction were 35% HTI and 46% DTI. When considering the borrower was not increasing his housing expense which he had paid in a satisfactory manner while paying off mounds of credit card debt and saving for the purchase of the home I felt that the ratio even exceeding guideline was acceptable. This combined with his shear willingness to repay all of his financial obligations demonstrated to me that criteria where willingness and capacity had been met. So, I documented all of the above, provided a narrative for the HUD underwriter and submitted the case as a test case. Two days later I received my firm commitment from HUD, no conditions listed and this is not the only case such as this that I have submitted for test cases.
In closing I would just like to say that if you have a borrower that you really feel will perform under the mortgage Note and have documentation to demonstrate extenuating circumstances for the less than perfect borrower, document the file well, provide your underwriting comments in narrative and submit the loan for test case purposes. Don’t just turn a borrower that you would otherwise approve down because you are in test cases. The worst that can happen is the HUD won’t issue the firm commitment but I am sure they will recognize that the file was well underwritten. As always, Happy Underwriting!