Written By: Bonnie Wilt-Hild, Op-Ed Writer
Recently, I have noticed that there are few misconceptions about how we underwriters go about determining if a borrower is qualified for the mortgage for which they have applied. Now I know there are several loan officers, not to mention realtors who would swear that we underwriters rely solely on our psychic abilities to determine if a borrower is approvable and I’m sure that a lot of the processing staff would also agree that we are proficient at this sort of thing, I base this assumption on the quality of file we usually get from an underwriting standpoint, by this I mean no employment information filled in on the 1003, no bank statements evidencing sufficient funds to close, seriously if we didn’t have those psychic abilities how else could we determine where the borrower works, but that isn’t the only thing an underwriter considers when contemplating loan approval.
While having psychic ability helps, particularly when the transaction type isn’t completed on the application, I have to say psychology as well as technical guidance plays a more crucial role. That’s right, financial psychology is really pretty critical when assessing overall case file risk. Now I know everyone is thinking how would psychology have a thing to do with underwriting so I will share.
First and most importantly, underwriters do not base underwriting decisions on rather or not the borrower is a nice person. I know it is something we should consider given the fact we are helping the individual reach personal goals, raise a family and all of that stuff, but quite frankly everyone being a nice person does not demonstrate capacity to repay or rather or not the borrower is on sound financial ground, only analyzing the borrowers overall financial behavior as well as determining if the case meets suggested technical guidance can do that.
That technical guidance suggests that in order to adequately assess risk we need to analysis capacity to repay debt, willingness to repay debt as well as the adequacy of the collateral. Of course these things are done by reviewing paystubs, W-2’s, bank statements and calculating debt to income ratios and determining LTV. We also review the appraisal data to determine that the collateral property supports the loan amount being applied for so that in the event of foreclosure the collateral will be sufficient to repay the debt. However, through the haze of technical review, we also review the borrowers overall financial behavior which is where the psychic ability misconception comes into play.
Analyzing financial behavior is a little more subjective because no two borrowers are the same. To do this underwriters must review the case to determine income stability both historically as well as future continuance, review a borrower’s credit report, not just the score but the whole report to determine the overall likelihood of repayment, assess derogatory credit and determine if any extenuating circumstances contributing to the late payments are likely to reoccur. We determine how the borrower has handled their credit obligations over the life of their credit history, is the borrower a conservative user of consumer credit or do they appear to finance their monthly budget based on outstanding balances on credit cards, what are their ratio’s and do they appear to be excessive based on the borrowers overall spending vs. savings habits. Bank statements are often used to determine spending habits as this will ultimately determine if the borrower will be able to absorb the proposed increase in housing expense. Believe it or not everyone, borrower’s who seem to be adamant about purchasing properties that for all intensive purposes they don’t appear to be able to afford really causes concerns for underwriting.
So to lay the theory of psychic underwriting to rest, I want to say I am working on my ESP skills but for now originators and processors will still have to let me know where the borrowers work and how much money they make. As for the rest of the technical stuff, just realize that we really don’t sit around and think of way to kill deals, we just simply want to make sure that when that really nice borrower realizes his or her dream, it’s a sustainable one. Have a great week all!
About The Author
Bonnie Wilt-Hild - As an op-ed writer, Bonnie holds 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".