How Loan Officers Qualify Borrowers, Issue Pre-ApprovaLS

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How Loan Officers Qualify Borrowers is one of the most important factors in the mortgage process.  The Pre-Approval Process is the most important stage of the mortgage process. The number one reason why borrowers get a last-minute loan denial by the underwriter is that the loan officer did not properly qualify borrowers The mortgage business is quite complex. It takes time for a loan officer to become an expert with the various mortgage guidelines and case scenarios that are presented to loan officers

Every mortgage case scenario can be different depending on the borrower’s credit and income issues. Loan Officers are not just faced with being familiar with the various mortgage lending guidelines by FHA, VA, USDA, Fannie Mae, and Freddie Mac, but they also need to know their employer’s investor overlays. Each lender has its own lender overlay. Lender overlays are mortgage requirements that are above and beyond the minimum federal lending guidelines. 

 Just because a borrower meets the minimum HUD FHA Guidelines does not mean that they will get qualified with all FHA-approved lenders. For example, HUD, the parent of FHA, requires borrowers to have a 580 FICO credit score to qualify for a 3.5% down payment home purchase loan. A lender does not have to lend with a borrower who applies with them with a 580 FICO credit score. Mortgage companies can have lending requirements that are above and beyond the minimum agency guidelines 

Most lenders do have overlays on credit scores. They will require a higher credit score than the minimum 580 FICO credit score required by HUD. Most banks will require a 640 FICO credit score. Some mortgage companies will go down to a 620 FICO credit score. HUD allows borrowers with under 580 FICO credit scores to qualify for FHA Loans. However, a 10% down payment is required.

4 Lights Financial will approve borrowers with credit scores down to 500 credit scores with an approve/eligible per automated underwriting system. Besides the 10% down payment, compensating factors are expected with borrowers with low credit scores. 4 Lights Financial does not have any lender overlays on government and conventional loans.

How Loan Officers Qualify Borrowers? The initial interview:

• The first stage in getting      pre-qualified and pre-approved for a home loan is by the first interview      between borrower and loan officer
• The loan officer will ask      borrowers a series of questions prior to taking their loan application and      running credit
• The first important question      the loan officer asks the borrower, especially if the borrower contacted      the loan officer from an online ad in which state the borrower is looking      to purchase a home
• In order for a loan officer to      be able to originate and fund a borrower’s mortgage loan, the mortgage      company that the loan officer represents needs to be licensed
• Second, the branch office that      the loan officer has their mortgage loan originator’s license needs to be      licensed in the state the borrower is interested in getting a home loan in
• Third, the assigned loan      officer needs to be licensed
• These licensing requirements      apply to mortgage brokers and mortgage bankers but FDIC insured banks are      exempt from state licensing requirements. So if the loan officer is      employed by an FDIC Bank, the loan officer need not be licensed in many      states and is exempt from taking and      passing the NMLS Exam

The loan officer should take notes while interviewing the borrower. 

Here are the typical questions loan officers ask borrowers when pre-qualifying borrowers during the initial interview:

• What is the price range of the      home you are planning on purchasing? ( Important for DTI Calculations)
• What is the property taxes on      the home that you have been looking for? ( Important for DTI Calculations)
• Do you know approximately how      much the homeowners’ insurance premium is and if the property is located      on a flood plain? ( Important for DTI Calculations)

Borrowers:

• Who are the borrowers ( caller      and spouse or just caller)
• Are the borrowers hourly,      salaried, or self-employed?
• If hourly, ask how much an      hour, overtime, and/or bonus income
• if so if they had the longevity      of at least two years
• if salaried employees ask how      much they make as an annual salary and divide that by 12 to calculate      monthly gross income

If self-employed, ask if they have been self-employed for at least two years  

Loan officers should take time in interviewing borrowers. Most borrowers may not know what information to volunteer. Therefore, it is key to ask borrowers important questions that may affect their qualifications. The following questions should be asked:

• Social security income
• pension income
• child support income can be      counted
• Part-time income
• overtime income
• bonus income
• other income can be counted as      long as they had a history of receiving such income for the past two years      and the probability of continued income will look promising for the next      three years.

Those with irregular income and/or higher debt to income ratios, ask them if the need arises if they can get a non-occupant co-borrower to go on the loan with them. 

Ask them if they have a car payment, student loans, any other monthly debts. Ask them if they have credit cards. What the limits are and the balances (Used for debt to income ratio calculations and to see if there is any room for credit improvement). Paying down maxed-out credit cards is a great way of boosting up credit scores).

Loan officers need to make sure if the borrowers had a prior bankruptcy and/or a housing event. There are instances where bankruptcy, foreclosures, deed in lieu of foreclosures, short sale, judgments, tax liens do not report on consumer credit reports. The waiting period start date of a foreclosure and/or deed in lieu of foreclosure does not begin until the actual recorded date of the foreclosure and/or deed in lieu of foreclosure and NOT the date the home was forfeited to the lender:

• Borrowers must meet a 2-year      waiting period after Chapter 7 Bankruptcy for FHA and VA Loans
• Mortgage borrowers must meet a      three year waiting period after the recorded date of foreclosure, deed in      lieu of foreclosure, short sale on FHA and USDA Loans
• There is a two year waiting      period after foreclosure, deed in lieu of foreclosure, a short sale on VA      loans
• Borrowers must meet a 4-year      waiting period after Chapter 7 Bankruptcy for conventional loans
• There is a four year waiting      period after the Chapter 13 Bankruptcy dismissal date to qualify for      conventional loans
• Mandatory waiting period after      the Chapter 13 Bankruptcy discharged date to qualify for conventional      loans
• There is a four-year waiting      period after a deed in lieu of foreclosure and short sale to qualify for      Conventional Loan
• The waiting period is 7 years      after a foreclosure to qualify for a conventional loan
• Borrowers must meet a waiting      period after a deed in lieu of foreclosure and foreclosure starts from the      recorded date
• And/or sheriff’s sale and not      the days that the property was surrendered or the keys were turned in

4 Lights Financial offers non-QM mortgages one day out of bankruptcy and foreclosure with 30% down 

Mortgage Part Of Bankruptcy On Conventional Loans :

There are instances where borrowers can qualify for Conventional Loans but not FHA Loans due to the recorded date of their foreclosure on cases where their mortgage was included as part of their Chapter 7 Bankruptcy.

If you had a mortgage or mortgages included as part of your Chapter 7 Bankruptcy the following guidelines applies:

• there is a four year waiting      period from the discharged date of Chapter 7 Bankruptcy discharged date
• the recorded date and/or      sheriff’s sale date of your foreclosure does not matter
• this holds true even though is      much later after the discharged date of your BK
• This does not apply with      FHAlLoans

With FHA, if you have a mortgage included in your Chapter 7 Bankruptcy, there is a three-year waiting period from the recorded date of your foreclosure and/or sheriff’s sale date. This can be an issue when qualifying for an FHA Loan if the recorded date of the foreclosure is prolonged many years after the Chapter 7 Bankruptcy discharged date. 

Ask about collection accounts, charge-off accounts, judgments, tax liens, or delinquent child support and/or student loan accounts.

Loan officers need to understand that just because a borrower may meet HUD or Fannie/Freddie lending guidelines does not mean that they are fully qualified and a pre-approval can be issued. Loan officers need to check with their employer and make sure on the investor overlays their company has and get familiar with it before issuing the borrower a pre-approval letter.

Loan officers also need to be aware that if a borrower went through credit repair and had public records such as the following:

• bankruptcies
• foreclosures
• short sales
• judgments
• tax liens removed off their      credit reports that it will pass Automated Underwriting System

However, all borrowers will go through a third-party public records check and all public records will be discovered 

The Pre-Approval Process:

• Once the loan officer deems      that the borrower pre-qualifies for one of their loan programs, the loan      officer can take the application over the phone
• Or direct them to their      company’s website and have the borrower complete 1003, which is the      official 4-page mortgage loan application
• After reviewing 1003, the loan      officer will run a tri-merge credit report and will use the middle of the      three credit scores

The loan officer needs to carefully review the borrowers’ credit report and look out for the following:

• Payment history for the past 12      months is a must on how loan officers qualify borrowers
• The best way how loan officers      qualify borrowers is for them to thoroughly review the borrower’s overall      credit history besides just the borrowers’ credit scores
• Look for late payments, credit      disputes, collections, periodic late payments, and mistakes on the      borrower’s credit report

Credit Disputes:

• How Loan Officers Qualify      Borrowers again depends on each individual loan officer
• But every loan officer needs to      thoroughly review the borrower’s credit report for credit disputes
• Borrowers cannot have any      credit disputes on non-medical collection accounts if the aggregate total      unpaid outstanding balance is greater than $1,000
• Borrowers cannot have any      credit disputes on charge off accounts

Borrowers can have credit disputes on medical collection accounts as well as non-medical collection accounts with zero outstanding balances 

The Importance of Income In The Qualification And Pre-Approval Process:

• Make sure that income has been      properly qualified
• If there are any questions on      income, the loan officer should do a verification of employment prior to      issuing a pre-approval
• Loan officers need to take 5%      of non-medical collection accounts that are greater than $2,000 and use      that as monthly debt in the debt to income ratio calculations
• This holds true even though the      borrower does not have to pay anything
• If the 5% of the outstanding      non-medical collection accounts is too much and will disqualify the borrower      from qualifying for the mortgage, then the borrower can make a written      agreement with the creditor
• The amount agreed on the      written payment agreement will be used to calculate the debt to income      ratios
• Loan officers need to check      with their company and make sure there are no lender overlays on      collections accounts and charge offs
• Many mortgage companies will      have overlays on collections and charge offs

Many will request that collection accounts and charge-offs be paid off even though HUD does not require it.

The number one reason why there is major stress during the mortgage process and the single biggest reason for last-minute loan denials is due to the borrower not being properly pre-qualified by their loan officer.

Our loan officers will not issue pre-approvals without properly reviewing the necessary docs and reviewing the borrower’s credit report. Just because you have a higher credit score does not automatically qualify a borrower. Special attention needs to be given to the borrower’s payment history, especially the past 12 months. Late payments on a mortgage in the past 12 months can mean denial from the Automated Underwriting System. It is always recommended that a loan officer run the borrower’s mortgage application through the Automated Underwriting System.

Importance Of Automated Underwriting System Approval Prior To Issuing A Pre-Approval Letter

Loan officers will make sure to get an approve/eligible per automated findings before issuing a pre-approval letter:

• For example, if a borrower had      a 580 FICO credit score and qualifies for a 3.5% down payment FHA home      purchase loan, the Automated Underwriting System can      request verification of rent as part of the condition 
• If the borrower has been living      with family and cannot provide 12 months canceled checks and/or bank      statements showing their rental payments being deducted out of their bank      account, then this borrower will not qualify for an FHA Loan
• This is because the      verification of rent cannot be proved and for the AUS to be valid
• All conditions on the AUS needs      to be met
• There are times where a      borrower is very antsy
• They will threaten the loan      officer if they do not give them a pre-approval that they will go with a      different lender
• If that is the case, it is best      to let the borrower go to a different lender
• This is because of the      consequences involved
• Issuing a pre-approval before      the loan officer is absolutely sure can create a lot of problems because a      borrower can enter into a purchase contract

Not only will the borrower not qualify for the mortgage, but it also affects the sellers, the realtors, the attorneys, and everyone involved in the mortgage process