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How does mortgage underwriting work?

How Does Mortgage Underwriting Work?

Have questions about how Mortgage Underwriting works?

This week, Josh Lewis is joined by Jason Pitarra and Jim Duffy as they discuss How Mortgage Underwriting Works.  You can join the conversation live on Youtube every Thursday 5p/6m/7/c/8e time zones.

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Transcription of Live Discussion

Jason Pitarra: Scott Schang I guess a couple of years ago. And it’s funny, we were talking about doing video and he was telling me about the, find my way home network. And it’s a group of very experienced high-level people. And I was like, this is exactly what I needed to get on. Educate more consumers to share some of the knowledge that we had so we can share the wealth with everyone

Josh Lewis: Absolutely. And a lot of that came out of Scott and I here in California. We’re only licensed in California and you can’t put a geo-fence around a website and answer questions only for Californians. So it does end up spreading around the country and we’ve got a lot of questions and through the timeline through, through the 10, 12, 15 years, we’ve had people just like yourself. Join us on this journey. Expert loan officers, who’ve been in the business a long time. They’re focused on helping consumers. Now our other guest here is Jim Duffy with Alcoa mortgage in Charleston, South Carolina, just before we came on, I didn’t realize Jim was in Charleston.

Josh Lewis: Charleston is home. Favorite barbecue place on the planet. And I may not be able to concentrate on mortgages tonight. I may just think about going back to Louis barbecue.

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Jim Duffy: There’s something to be said for Charleston is the culinary capital possibly of the nation. I will say at Louis barbecue.

Josh Lewis: That’s what I understand.

Josh Lewis: We, we were looking at places to eat and I just get fixated on barbecue, but there’s a lot of really good food in Charleston, oh

Jim Duffy: man. We can never exhaust it. We’ve been to so many restaurants here and we haven’t hit them all, not even close toss.

Josh Lewis: I’m coming back. So aside from food and barbecue, tell us a little bit about yourself, your practice how you got into the business and how you came to via find my way home

Jim Duffy: expert.

Jim Duffy: Yeah. I’d be happy to Josh. Jason. Good to join this. Or this afternoon, depending on where you are in the country. And yeah. So you mentioned too, I think Jason, you mentioned 2008 and whatnot, and Josh and that’s for Scott got online and you, Josh got online and started finding my way home. Scott and I were together at the time because we had a little group, a little private Facebook group where we all shared a lot of best practices at the time and all figuring out.

Jim Duffy: All the realtors just left the business. What are we going to do? And so Scott went online and a bunch of us tried different things and I’ve been friends ever since. And it’s it’s been great because find my way home really rose to the top of all the efforts that all of us had at the time as the number one thing I think to really educate and answer questions and dive deep into what can really help the homeowner, the home buyer to understand the questions.

Jim Duffy: Grasp what they’re doing. And I guess the key is to feel confident about the home buying process

Josh Lewis: and that right there, Jim’s a great kickoff to tonight’s conversation. We’re going to answer one of, if not, the most frequently asked questions in mortgage, when someone actually gets into the process.

Josh Lewis: If you’re thinking about buying a home, you are probably not on this path, but once you get into the process you’ve met with one of us you start. Underwriting, he keeps talking about underwriting. What is underwriting and what does it mean? So start with a super basic definition of it. It’s the process that the lender uses to take an in-depth look at your file to ensure that it meets the guidelines of the loan program that you’re qualifying for.

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Josh Lewis: So essentially it’s a person sitting there examining all the paperwork that we gather and collect and confirming that you do actually qualify. For the loan. So that’s a super simple, brief description. We’re going to go much more into greater deal detail on that. Jason w why don’t you, before we get to that, how do we get to underwriting?

Josh Lewis: So when we’re ready to go into underwriting, we’ve we tell people what have you done with, and for a client before we even get to underwriting?

Jason Pitarra: We said I was going to add Josh. So I think it’s one of my first bosses told me, I was like, who’s this underwriter? We’ll explain this today. He’s he said, basically we can’t let the inmates run the asylum.

Jason Pitarra: So it’s a real, our salespeople and we want to, we w we want to sign off on everything. So for any customers out there thinking, why are they being so hard? We’d love to clear it, but the underwriter obviously clears it on behalf of the company, the ones putting up the money. Before we’ve gone to the underwriting process typically we have declined has given documentation and paperwork that their upfront salesperson thought they might need.

Jason Pitarra: They either did their due diligence or the. They either miss something or they’re very thorough and they got it also. A lot of that we think they’re pre-approved and sometimes, in fact, they actually haven’t because the underwriter has. Did that answer the question?

Josh Lewis: Absolutely. So if you’ve gone through the process before, you know what folks like us ask for, we want to see your income documentation.

Josh Lewis: We want to see your assets banking, retirement accounts, investment accounts w we’re going to want to see a credit report, which we’re going to pull on our. Basically all of that first-party documentation that comes from you guys third-party documentation, like appraisals, and preliminary title reports. It all goes into that file.

Josh Lewis: That tells a story. I keep saying it like, it’s a file like this, that tells you I’ve done it too long because now it’s just it’s zeros in one computer, no one actually has paper files sitting on their desk anymore, but we still think of them that way. So when we think in terms of an underwriter.

Josh Lewis: Do they review the file to confirm that it meets the guidelines? There are four main things they’re looking at. We’re going to jump into detail on that. They’re looking at your credit, they’re looking at your capacity to repay, which is primarily your income, your capital, or your cash, the money that you have for your down payment and your closing costs.

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Josh Lewis: And they’re looking at the house that is the collateral. Jim, why don’t we start? Credit’s a big one. It’s an easy one because everyone’s getting a, their credit card statement or credit karma. They have an idea of what it is. When the underwriter jumps into a file and they’re reviewing credit, what’s an underwriter looking at.

Jim Duffy: Yeah, that’s a good question. So the credit report is the basis of it, but the credit report tells a story. First of all, if I can take one step. Think of an underwriter for anyone who’s looking to buy a home and says I’ve heard underwriters ask for way, way too much stuff. Imagine you’re Josh and you’re wearing Lewis’s barbecue hat on this side with the brim coming out.

Jim Duffy: But if you turned it around, it’s got, Rodney’s cut barbecue on the back, right? Because an underwriter really wears two hats and one is they want to approve your home loan and get you into the home that you want to get. Then they turn it around and the other hat is they want to protect the company and make sure that file, that hard file or digital file meets the criteria of who we’re going to sell that loan to whether it be Fannie Mae, Freddie, Mac, FHA, VA, whatever, or insure the loan by.

Jim Duffy: So with credit. And I think the two hats is important because if the home buyer understands that it sheds light on, oh, they’re not just nitpicking. They’re making sure that the company is okay and we can sell this slump. So I hope that helps put a context to it. At least with credit, it’s just a credit report, it tells a story. So the story is you’ve had debt before you’ve taken on debt before with a promise to repay it. How’s that going? And I think that’s the easiest way to think about it. If there’s a lot of late pays or slow. It’s a red flag. At least it doesn’t mean you won’t be approved, but it’s a red flag that we looked at.

Jim Duffy: And if there’s a lot of collections, it means for whatever reason, you didn’t pay some debt. A potential buyer didn’t pay some debt that was obligated now why? And that is the reason. And then there’s sometimes there’s bigger. More serious issues like bankruptcy, a foreclosure, a deed in lieu of foreclosure something like that.

Jim Duffy: And the underwriter really has to look at that. What was the cause? What caused that? Because what the underwriter’s looking for is not, you were a bad person. No. no. Those things happen to so many people. All of us have seen all of that so many times and the. Is it going to happen in the future?

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Jim Duffy: Did you lose your job? Was it a divorce? Was it all these reasons exist? Why credit takes a hit and a bump and the underwriter wants to make sure we pass that. So I think that’s really what credit is all about. It’s the credit report, but it goes deeper than that. It’s going forward. What’s it look like?

Jim Duffy: That

Josh Lewis: was going to say

Jason Pitarra: Josh too. I think it’s super important. We get calls a lot. It doesn’t always disqualify you, but generally, most lenders have a credit score requirement. And I don’t think we’re going into detail to that. We all accept our risk and what we want to lend to as a bank or as a lender.

Jason Pitarra: But we’ll get the clients to call and say I pay cash for everything. And it doesn’t mean you’re just because you don’t have a credit score, you won’t qualify, but for most banks, they want to see credit history to at least determine what your ability to pay it

Josh Lewis: back. No I think you bring up a really important point in terms of credit scores and without going into, because every loan program has its own credit score requirements.

Josh Lewis: Credit score requirements, but those can even vary by lender. Lenders can have their own overlays. And that’s what, one of the things that the underwriter’s looking at, do you meet the credit score criteria? But what I like to tell people, I started doing this in 1996. I was one of the last people into the business where we still had to manually underwrite every file.

Josh Lewis: There was no automated underwriting. We didn’t even have a credit score. On the credit reports at that time credit scores and ma and automated underwriting came in together at the same time and all say that anyone that came after 2000, there’s a sort of a blind spot that, that those loan originators can have in that they collect all the information.

Josh Lewis: They make sure it looks right on the screen. They see the credit score meets the requirement. They push a button, they send it to the automated underwrite and it comes back and it gives them an approved. That doesn’t mean that the underwriter is going to look at that credit report and still say, it’s okay.

Josh Lewis: There’s a million things that can be hiding and lurking in that credit it. So before we move on past credit do either one of you guys want to jump into some of the things that may be on a credit report. And again, it’s probably helpful to say, to explain what a credit report is. It’s really it’s dated.

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Josh Lewis: In a file that is read by the automated underwriting system, 90% plus of loans, they are go through an automated underwriting system before going to the actual underwriter for validation. And a lot of times what that automated underwrite is doing, it’s not picking up all of the data, one of the big ones that we have.

Josh Lewis: So as an example for you guys, and I’m sure you have some examples to add on top of this, when we had the foreclosure crisis. A lot of people would have had a bankruptcy in there as well. So you could have had a bankruptcy, they stopped reporting on the mortgage and then the mortgage goes to foreclosure credit score.

Josh Lewis: Can’t see it because the foreclosure never showed on the credit work. It stopped reporting score looks okay. It goes through the automated. Underwriters with their, microscope are going to dig into that and see that. It’s important. All of the things that, that Jim talked about, they’re looking at, how have you paid people back?

Josh Lewis: What do you owe? What do you owe relative to your current limits? Most of that is picked up by the automated underwriting system. But our Intrepid underwriter is still going to go through that thing line by line and make sure there’s nothing else hiding in there. That would disqualify you from being eligible.

Josh Lewis: Before we move on from that and anything you guys wanted to add to credit and what you’re looking for when you’re helping a client.

Jim Duffy: Yeah. I’ll jump in first. I, that’s a very good point because it brings up two things. One is some people are. Fearful because they’ve got some blemishes on credit, I would suggest don’t be, but other people want hide something and sweep it under the rug.

Jim Duffy: Like we’ll never figure it out. Look, we’ll figure it out better to talk about it upfront. Just bring it up. Whatever it is. And the big example is where a foreclosure does not show up on creditors. Guess where it’s going to show up on title. When you’re going to buy a home, we’re going to pull title on that home and everything else goes up title-wise that you’ve ever experienced.

Jim Duffy: So especially if, to bring those things up, because if we know right up front, we know how w we’re very experienced. You’ve been in the business. What? 25, 20 more than 25 years Jason’s been in business a long time. I’d been in the business 20. We’re not the guy who on the commercial, whatever mortgage companies on that latest commercial, when you watching golf or football in the cubicle who just got there in the last year and probably will be first out the blade off as they lay off, we’ve been at it a long time.

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Jim Duffy: So we know how to structure loans and make them work if we know the whole picture. So that would be. 2 cents to add.

Jason Pitarra: I would say Josh, that probably one of the, we created a checklist for loan officers because I’m like, okay, what are the top things that one officers make mistakes at?

Jason Pitarra: Especially if they’re new, like Jim said. And one of the things that continues, I continue to see as a problem is a district. And so you’ll have these credit companies, a credit repair restoration say, Hey, we’ll just dispute that account. And then, it has a bearing on the credit score that takes it out of the calculation.

Jason Pitarra: We won’t go too far into that detail, but depending on which loan program we’re going with, you’ve got to remove the, you have to remove the dispute. And if a loan officer, when they get that pre-qualification letter up front before the underwriter gets, it didn’t catch that it could be a serious problem.

Jason Pitarra: Next biggest thing. Have you, if you’re serious about buying a house, have the lender pull your credit report? Again, another very complicated topic, but there’s different credit score models out there. And the ones that all most of the lenders use is the one that’s a little more stringent, a little more strict.

Jason Pitarra: I see myself probably 20 to 30 points lower than what the consumer monitoring type of source brings in. So I don’t know if you guys see a different opinion about.

Josh Lewis: The worst part about it is it’s more overstated for the lower credit scores. If someone tells me, Hey, my credit karma says I’m an eight.

Josh Lewis: They’re going to be pretty darn close to an 800. If they tell you, Hey, I’ve been working on it. I just got it up over a 680. I hate to tell you that thing, ain’t going to be over a six, eight, and you guys are probably seeing the same thing. So you want to work with someone experienced and knowledgeable that seen a lot of the credit reports can help you with that.

Josh Lewis: Jim, one thing that you said that I want to add on to and it’s really just a different variation of exactly what you said the way I see our job. Is as an editor, you need to tell us your entire story. And we want to edit that story as pretty as possible so that when the underwriter gets it, they’re reading this beautiful story and they go, I love this.

Josh Lewis: I want to be part of this re

Jim Duffy: approved a hundred percent. We have all done that. And a good loan originator knows how to do that. How to present that story to the. So it has the best chance of approval. I love that. That’s great,

Josh Lewis: but you can only do it if you know the whole story. If someone gives you bits and pieces, the underwriter’s going to start pulling it up.

Josh Lewis: Wow. This story doesn’t quite make sense. And they start pulling this draws and the whole thing unravels. So when we’re thinking in terms of underwriting, Don’t think in terms of, I need to hide things. You need to be working with your originator to disclose everything. Our job is to get you alone. That doesn’t mean to do wrong, fraudulent things and hide things, but there are ways to package and structure and tell your story in the best possible way.

Josh Lewis: So that an underwriter sees you as an acceptable creditor. And meeting the guidelines. So with that in mind, let’s jump on to, to mortgage loan approval factor number two, which is capacity, a fancy way of saying your income or your cashflow available to repay the loan. Jason, Jim, either we didn’t want to jump in and it’s a big topic.

Josh Lewis: In terms of all of the potential income sources, what is an underwriter looking at when they’re measuring your ability to repay the loan?

Jim Duffy: Jason wants you to go first. I’ll jump in. Yeah. Thanks, Jim.

Jason Pitarra: So capacity really is looked at in two ways. The overall debt to income ratio is the most, most important I think.

Jason Pitarra: But we do look at the overall what we call here’s, how much I make a month and here’s how much my debts are. The beautiful news is we get to use gross pre-tax money. But what we’ll do is add up the minimum payments on credit cards. And another thing the underwriters looking for is auto loans.

Jason Pitarra: There’s a lot of things that are not included in. We could go on a long list, home, what is it? Car insurance, telephone bills. There’s some things that we just don’t consider. This is why you need a good professional on your side to say, okay, how much do I make a month? And really when you get all those questions of what, how’s your income broken down?

Jason Pitarra: And it almost sounds like the loan officers, the good ones are investigating like, Hey, what have you done for the last two years or one year? We’re really trying to figure out if it’s an acceptable source of income to see if the underwriter and the loan programs will accept. As an acceptable source for that capacity ratio.

Jason Pitarra: And another piece we’ll look at as the, what we call the front end ratio, which is your housing only compared to your gross. And then of course, like I said, at first, the total, what we call debt to income ratio capacity.

Josh Lewis: That’s one of the big differences back in the nineties, you had your paper guidelines and you’d open up the book and I say, your front end ratio, your housing to income ratio has to be this.

Josh Lewis: And then you obviously have other debts. And so your total that income ratio can be a little bit. For Fannie Freddie loans, most of the time, a double ratio, meaning just one total that didn’t come ratio is okay. FHA has a 47% front-end and 57% backend as a max with an automated underwrite. So th these things move around a lot, but really what we’re looking at is going back to the credit report and saying, what are the debts that we have?

Josh Lewis: What are our proposed debts with the new home that you’re buying, including taxes, insurance, any mortgage insurance, any HOA, dues, anything, and everything. And they’re really going to dig into your income. Jim, one of the things that I get so often is. Barbara provides all their stuff. We get the file ready to go.

Josh Lewis: We send disclosures out and they go, Hey, I can’t sign this. I make a lot more money than that. Can you explain some of the differences is how underwriter is going to calculate your income versus what you think you make today this month? Yeah, I

Jim Duffy: can. So the way I normally put it as there’s really two types of income and it’s very easy to distinguish.

Jim Duffy: If you just think of this. Stable income from today going forward. And the other is unstable and. And there you have to look backwards. So when you look forward, you have to look backward. And where you look forward is where your income is consistent. If you’re on a salary, you make $60,000 a year, you’re going to make $60,000 a year next month.

Jim Duffy: And the month after that, the month after that. So as long as you don’t lose your job, or if you’re hourly, you make $22 an hour and you work 40 hours a week. We know exactly what your income, your base income, you may have overtime, but we know exactly what your income is. $22 an hour, times, 40 hours a week.

Jim Duffy: That’s it. That’s your income. The problem comes when the income there’s two other distinct distinguishing things, but the main one is weighing income. You have to look backward. And that is if someone’s self-employed right, the three of us know this we’re considered self-employed because our income varies because we’re on commission, right?

Jim Duffy: And so our income varies every single month. So we have no idea what our income an underwriter has. No idea what our income is going to. Six months from now, the only thing that the writer can do is look backward and say you’re, self-employed, let’s look back two years. See what you made the last two years per tax returns, for example, and that’s your that’s and divide by 24.

Jim Duffy: And that’s a reasonable average income that we can use going forward. Assuming everything else is stable. So that’s the biggest one I get. And part of that, and I’ll just have a tangent. Is with so many people these days they’re working two jobs, right? You have a full-time job and you’re an Uber driver or a full-time job.

Jim Duffy: And you started a business or whatever. That’s perfectly fine too, but they’re a two year history does come into play. So many people think they have to be on the job for two years. Absolutely not true. You can be starting the job in two months and still be approved today for a home loan. And we do that a lot because it’s stable income at the time that it starts.

Jim Duffy: But if it’s not, or if it’s, you have to show us stability of unstable income, and I know that’s a contradiction, it sounds but the best way to do that is to average going backward, take the average and say that’s about the average. That’s what we can

Josh Lewis: count on going. So to recap the first two factors here of underwriting that we’ve talked about are the most important.

Josh Lewis: They’re gonna look at your credit and not just the credit history, also the debts. And that’s where we start to be able to now look at capacity, your income, and calculating a debt to income ratio. So when most people think in terms of, am I going to qualify for a mortgage, those are the two big things they’re thinking about.

Josh Lewis: But we also get a lot of questions in terms of. Capital or your cash that you have available for your down payment and your closing costs. Jason what are the big questions that your getting or what is an underwriter looking at in terms of someone’s bank statements and their available funds that could be problematic that we often get questions from borrowers about, is this going to be okay?

Josh Lewis: Can I do this? What about that?

Jason Pitarra: I think a lot of us hear this all the time as, oh, I need 20% down. And so to go into a little more detailed. It really depends on the loan program and literally what the underwriter wants to see is, okay, where’s the funds. Are they acceptable funds for underwriting depending on the product and the loan type.

Jason Pitarra: You can need one month bank statements to no screenshots, please. That’s.

Josh Lewis: Yeah, we should make a show just about no screenshots, no JPEGs, no screenshots of anything from your phone is not going to be okay if it’s acceptingly

Jim Duffy: stuffed in the couch and a picture. No. So the underwriter

Jason Pitarra: wants once acceptable documentation and usually. For acceptable documentation, depending on how many months of statements that is.

Jason Pitarra: And then it is, we need all pages. It makes it an official document. That’s what the underwriters want. I promise we’re not being complicated. But it has to be all pages. If it’s a retirement account, we need to see what are the terms of withdrawal and then determining how much money you actually mean.

Jason Pitarra: Just depends on the down payment percentage. We do quite a bit of down payment assistance in my area. So that will cover some, but we still need extra money for reserves to see. Okay. Once you close on the house if you’re not going with the three, three and a half, 5% down minimum programs, which are your standard.

Jason Pitarra: Usually there’s a reserve requirement. Meaning after you come to closing with X amount of money, how much do you have left over to support your payments and expenses going forward? So it’s generally not acceptable to clear your bank completely. There are rare occasions, but the bank statements of what’s statements quarterly, monthly just depends on the loan process.

Josh Lewis: Jim, you have anything to add on that one

Jim Duffy: a little bit? That was that’s absolutely true. And the statement thing is, are the bane of our existence. Get the full bank statement. It’s just funny between us because we’ve all experienced it. Millions of thousands of times, the main thing with assets is we have to do one of two things.

Jim Duffy: We have to be able to show they’ve been in your account for usually two months plus, and that is called in our speak seasoned. Every industry has its terminology, right? Those are seasoned funds. In other words, they’re your funds. They’ve been in your account two months. No one else is after them. So we’re going to assume they’re just your funds, right?

Jim Duffy: Why they weren’t the other is sourced, right? So some people, lots of people sorta have to source funds. Let’s say you sell something to. Qualify for, to get the money for your down payment, right? Let’s see you sell a boat or a car or something. We have to source that with some documentation and sourcing just means documenting where to come from.

Jim Duffy: Maybe it’s a tax refund, easy to source, right? There’s a document for that. And other times it’s gift funds, right? Mom, dad, grandma, grandpa, want to help you buy a home because they know that’s an asset that will help build your wealth. It’ll really become the foundation of building wealth. So a lot of times, family really.

Jim Duffy: I want to help you get into your first home and they give you a gift. That’s great. We just sourced the funds. Usually it’s one month bank statement from the donor and that’s the big question. The is always like, why do I have to give my statement? I’m not in loan. It’s to prove that you have the capacity to give the gift.

Jim Duffy: I conventional loans for Nina donor statement, but on FHA, we still have. It’s just capacity and it’s sourcing the funds, sourcing the gift. And so that’s the biggest question that I get and the biggest thing that I come up with against, cause I don’t know about you guys. I speak Spanish. So I do a lot of in different cultures have different ways of managing money.

Jim Duffy: A lot of times Hispanics because of home country issues with banks and things. They don’t want to put their money in the bank. It’s buried in the tin cans in the backyard or somewhere. I don’t know. And so that’s where you can’t source it. So you have to season it cash you can’t source. So we have to season those funds.

Jim Duffy: So you have got to put them in a bank, leaving there for two months and then go forward with the homeless.

Josh Lewis: That’s 1, 1, 1 of the things there, Jim, the question behind the question that several things, when you said, when you have to source funds, if there’s a large deposit that shows up or that gift, that shows up the reason why I have to show the donors ability to gift the underwriters, big worry or concern there is that you borrowed.

Josh Lewis: Somewhere. And if you borrowed it, there’s a payment and we don’t have that payment included in the debt to income ratio. So they’re not trying to be an investigator and say that you’re lying. It’s just, they want to have their ducks in a row and make sure that there’s not any undisclosed debt out there.

Josh Lewis: So when we’re looking at assets, we want to make sure. It’s been in your account for two months. And in which case we wouldn’t have any of these large deposits. If we have large deposits, we want to have logical explanations of where the money came from. That those are acceptable funds.

Jim Duffy: Yeah. It just really, it’s just proving that you don’t owe more money.

Jim Duffy: It’s not a new debt that you took on to buy this house because yeah you’re absolutely right.

Jason Pitarra: Yeah. I think Josh it’s I just did a video about this is it. We’re really not telling you how to spend your money and how to move your money around. But for underwriting purposes before you make any transactions or transfers or large deposits, cash deposits, talk to your lender, talk to the expert, figure out if it’s going to be acceptable for underwriting, because that underwriters are going to see it on the full statement.

Jason Pitarra: Where did this money come from? It’s generally, if it’s outside of payroll.

Josh Lewis: Absolutely. And I don’t know about you guys, but most of the time I had a conversation with a client this morning, we spent 10, 15 minutes. I have this money it’s coming from here and we’re going to put it here. Is that a problem?

Josh Lewis: None of it was a problem. It was all okay. But he was asking, but it’s the one out of 10 or probably more like one out of 20 client that thinks nothing’s a problem. And it was just fire and money around Willy nilly. And I don’t know about you guys. I don’t know that I’ve ever had a deal fall apart because we couldn’t source funds.

Josh Lewis: You can unwell. But it can be a long paper trail and be a little unpleasant to have to do

Jim Duffy: that. That’s the problem with moving funds. That’s why I always recommend people. That’s why, for example when I know if someone’s getting a gift from grandma to help buy this home, I think that’s absolutely awesome.

Jim Duffy: And I tell them, don’t like, grandma put that in your bank account, grandma should wire those funds directly to the title company or closing attorney the day before closing don’t ever put it in your account because that. More paperwork. We have to show that left her account. It went into your account.

Jim Duffy: It’s now the balance let’s make it simple. So to your point, Josh, we’re part of what we’ve, what we’re trying to do is make it simple and reduce the paperwork. Believe it or not. And we can, in, in a lot of cases, if we just follow the lead and talk about it, we can reduce the paperwork and the headache a lot.

Jason Pitarra: I could have missed this one. Last thing I was gonna say. We have some clients that are like, we’ll have a hundred thousand dollars in the bank account. Hypothetically, why do you care where it’s at work came from? You could have borrowed the money. That’s not me saying that.

Jason Pitarra: That’s what the underwriter’s thinking. And if you possibly borrowed it, do we need to count another debt against your capacity, your debt to income ratio? There there’s really a reason for all of this. So I’m glad you were going into this.

Josh Lewis: So the last aspect, and by all means we’re covering the four major elements of underwriting to give you a broad overview of what an underwriter does, what they’re looking for and why you have no reason to fear it.

Josh Lewis: But every file is unique and there’s lots of little details. There’s no way in a 45 minute video we can cover all of that. But the last big section is the collateral. What do we mean by. The property. So we’ve got three main things and underwriters are going to review to, to determine whether the property is okay.

Josh Lewis: We’ve got the appraisal, we’ve got the preliminary title report. That’s going to tell us some things about the property. And then you guys, neck of the woods. We don’t really see these in California, but I think in both of you guys, market surveys are fairly common. Anything else that you guys see under collateral that underwriters are needing and reviewing and.

Jim Duffy: Okay. I’ll jump in. That’s the bulk of it, right? And then obviously it depends on the collateral at that point. So a lot of times there’s almost always an appraisal, an appraiser goes out and assures that this collateral is worth the, let’s say it’s a 500,000 out of the loan amount, right?

Jim Duffy: This collateral is worth the 500. So the lender is not putting themselves at risk. The Cola if for some reason the buyer couldn’t make those payments for whatever reason, the collateral would cover that. And that’s what the lenders trying to do. And then there’s a few things that and sometimes that requires the collateral’s good.

Jim Duffy: If, and only with. It’s safe as well. So sometimes the appraiser will make note of repairs for health and safety issues. But then there’s a few other things. So if the property is on sell or so septic or it’s just you’re just home happy today. If it’s on septic or lot of times we’ll have a need, a septic inspection.

Jim Duffy: Sometimes we will sometime. Or a well inspection to make sure the water is potable water and it’s healthy. And it’s if there’s a private, if there’s a private road, this doesn’t happen very often, but it does happen. We have to make sure that all the neighbors that come and go on that road have a road maintenance agreement together, things like that.

Jim Duffy: There’s things that do come up with the collateral, that it just depends on the property and the type of property and where it is. And I hope that helps.

Jason Pitarra: I think usually generally speaking, most of the lenders out there in traditional residential lending, like most of us do they don’t want commercial.

Jason Pitarra: They’re looking at, is this a commercial use loan or is it a as a, is it a residential use loan? And then one of the other things that I warn our clients about is you don’t want the biggest house in the neighborhood, because guess what? When the appraiser goes out, like Jim was saying to appraise the house the underwriter, when they look at the appraisal report, they’re saying nothing in this neighborhood is sold anywhere near this price or this size house.

Jason Pitarra: And they have nothing to compare it to. And at the end of the day, the we, as the lender or the lenders were delivering or selling to they don’t want the house back. And that’s we’re getting into this maybe a little in a minute. Really it’s someone says I have great cash or I have great collateral, but really at least these four items we’re talking about today, we’re looking at all of them.

Jason Pitarra: And if you don’t have one, sometimes that can disqualify you.

Josh Lewis: So I know in Texas, the survey’s a big deal for you guys. You want to go into a survey, what it is and why an underwriter would care about it.

Jason Pitarra: So the survey trying to think out, I always try to think of the easiest way to explain something.

Jason Pitarra: So I usually say the bird’s eye view of the. And where everything lies on the property or their utility easements on the edge that says, Hey, you can’t build anything permanent on five feet of the property. And is the house actually on your property and not the neighbors? So generally speaking, the survey is the bird’s eye view from the sky down to see where all the permanent structures lie and that it is on the actual.

Josh Lewis: Perfect. And going back to one of the things that Jim said, the appraiser is not a home inspector, but they are looking at the property. FHA requires a mini inspection. They have to look at a few things, but they are looking around to make sure there’s no. Health and safety items. And if there’s something that looks out of whack, they may call for a further inspection.

Josh Lewis: Your underwriter is generally not looking at home inspections. The home inspection is for you as a buyer to negotiate with the seller. But let’s say an appraiser goes out and they look and they go. That roof looks completely roached. And then they go in the house. Huh? There’s lots of stains in the ceiling.

Josh Lewis: They’re not qualified to say this roof is done, but they are qualified to say, we need a roof cert. So it can cause additional issues. They may go out and they see a rotted wood and they may. It looks like we have some wood destroying pests here and require a pest inspection and possibly a pest clearance, whereas not necessarily required in the contract.

Josh Lewis: So a number of things that your underwriter is looking for leading back to exactly what Jim said, they want to make sure the property is of enough value to secure the loan that they’re making in the event that they take that property back, that they’re not going to incur a loss because the home is worth less than their loan, including.

Josh Lewis: Any divert maintenance, any things that would need to be done to bring it up to speed, to sell it in their worst case. So with that, we’ve got a pretty good, big, broad overview of what your underwriter is, looking at, what they’re going through, what documents they’re looking at and reviewing one of the big questions that I see.

Josh Lewis: A couple of groups where we answer questions for veterans. They always say, Hey, we’ve been in underwriting for 10 days. Is that normal? How long does it take? What should a borrower expect in terms of a turn time to get their loan underwritten?

Jim Duffy: I can jump in first. If you like, it’s up to you.

Jim Duffy: Look it’s there. It depends a little on the lender, right? For example, We ended right up front, a lot of companies don’t. So it just depends on how the flow of your loan goes with the particular lender that you’re working with. And what I mean is I take the loan application, we structure the loan and say, whatever it is, it’s going to be conventional with 3% down, down payment, et cetera.

Jim Duffy: And then, and get the necessary paperwork, income and asset docs and whatever. And then it goes. Directly to my underwriter for me and the underwriter approves the loan subject to appraisal title stuff we don’t have yet. Can’t get at that point, but we’re, it’s being worked on appraisal title, homeowners, insurance, stuff like that.

Jim Duffy: Now other lenders worked at the opposite and there’s no right or wrong way. Everyone just has their own workflow and others get everything together just perfectly, they get the title, they get the appraisal, they get all your documentation, whatever, and then present it with a little bow on it, to the underwriter who should just have one look a really quick approval at that point.

Jim Duffy: But that’s much later in the process. So I think Josh, your question is I get that. We get that question. But it really depends on the workflow of the particular lender that you work. I think that helps.

Josh Lewis: And maybe let’s look at it from a different angle. I have a couple of friends that are underwriters, and I always like to know, and this varies.

Josh Lewis: And if we go back to the middle of COVID, when rates dropped to the floor and every loan officer underwriter person under the sun was buried, you were talking, some places were 30 days in underwriting and an underwriter was getting eight or 10 new files a day. But in a normal market, most of my underwriter friends say they’re assigned about three files a day.

Josh Lewis: So they go. So eight, nine hour Workday, they spend three hours in a file. They probably spend a little less than that. It’s about an hour and a half, two hours reviewing your file. But the thing that you got to remember, it’s like Jim said, they underwrite on the front end and then additional documentation comes in and that gets reviewed and there’s still a few conditions and those things come in and they get reviewed.

Josh Lewis: So from our end, one of the things that we as lenders are measured on in terms of our quality internally or for a broker. Our lender partners is how many touches does a file take. So in answering how long it should take in a normal market like today, my fastest lender will get us same day approved.

Josh Lewis: Worst lender is four or five days, but that’s a fairly normal market. Again, going back during COVID it was not uncommon that it was 30 days from the time it gets submitted to underwriting plan

Jim Duffy: prevalence.

Josh Lewis: Yeah. Yeah. So it varies by market. But if we have a normal market where there’s a volume of business, there’s been times where there’s so little business that everyone’s got same day underwrites, but in a normal market, anywhere from one to

Jim Duffy: the, freight’s go to 7%.

Josh Lewis: Exactly.

Jason Pitarra: Josh, I think two to four days for initial underwriting. Two, one to two days for what we call resets, where it’s going back in for the second time or third time, depending on how you structure your business.

Josh Lewis: And I think the Genesis of that question, when we get asked, if someone’s they told us they under, they submitted my loan to underwriting 10 days ago.

Josh Lewis: We haven’t heard anything back. Okay. That’s probably excessive in the current market, not in every market, but in the current market within a week, within seven days of when you’ve been told your files gone to underwriting, you should have a, an answer back another one, big, common, crazy misconception. Jason, why don’t you tell us?

Josh Lewis: So now my loans approved now I’m good. They’re not going to look at my employment or look at my credit or look at anything again. They’ve already underwritten my fire.

Jason Pitarra: Okay, so don’t go buy the furniture yet. So depending, so no, everything is not right. It’s funny. I have a pretty big team and I still went in today to look at our approval.

Jason Pitarra: Cause I knew it was a very complicated loan. Sometimes the underwriter will say you’re approved, but we want these conditions. And depending on who’s working that loan, that condition, that item, that stipulated. Could be obtainable or not. And we really need to try to address that if you’re good upfront and no, it’s not done Josh.

Jason Pitarra: They’re going to look at the credit again. In most situations, a lot of situations are going to pull it. We pull a software. To see if you’ve taken out new debt before closing a bill, move money.

Josh Lewis: I didn’t want to interrupt you on that, but it’s important point. I don’t want anyone panicking going, oh my God, they’re going to keep pulling my credit.

Josh Lewis: It’s undisclosed debt monitoring. It’s soft monitoring where it’s looking to see, have you taken out additional debt? They’re not literally pulling new hard pull credit reports. So I didn’t mean to interrupt you on that. Oh, you’re good. Yeah.

Jason Pitarra: So it’s not done yet. So don’t start moving money around.

Jason Pitarra: The process is usually an arch in our structure. The process. We’re not even talking about processors today, but I call them the pre underwriter. They’re trying to set everything up for the underwriter to clear they’re working on some items the underwriter might need, we’re working with the borrower.

Jason Pitarra: So at some items we might need from the borrowers to get that loan, what we call cleared for closing. So no don’t make any drastic moves yet. It’s not done. Until we get the clear to close, just hold your breath, hang tight until your professional gets you to the finish line and you hear that clerical.

Josh Lewis: I’ve so I’ve got one that’s even crazier we had in January, a lady who said she was in an abusive relationship. She had a protective order against her husband. She had to buy a house. Went way out in the sticks. Realtor found a home in the price range that I didn’t think we could find low enough in California, even by we look at it, it’s going to meet the minimum property requirements.

Josh Lewis: We can get it done. We get her loan approval. And about two days later, we find out she quit her job. My loan was approved if your loan was approved based off of you having a job. Any of that, your employment is going to be reverified at closing. Your credit is going to be monitored through closing, depending on how you move money around.

Josh Lewis: It can cause a problem for documentation. So the loan approval is letting you. Cool. W everything looks good, but don’t upset the apple cart between there in, in closing. Jim another thought with that, so cool. Now they have all my stuff. How long is it, is my documentation good for, is it likely to expire?

Josh Lewis: Is my underwriter going to be asking me for updated stuff throughout the process? Generally?

Jim Duffy: No, if you’re under contract, it means, every state has their different things, but if you’re under contract, it means you’re probably closing within 30 days contract to close most of the time, maybe 60.

Jim Duffy: But somewhere in there. So no, generally speaking.

Jim Duffy: Most of it doesn’t expire. Your credit report is good for four months. So if we pre-approved you, and it took you three months to find out. We might have to pull a new credit report because it might expire before closing. But we’re going to talk about that as soon as you get the contract generally, and we know what we need, same with bank statements.

Jim Duffy: If we got your bank statements three months ago, when you started looking for a home and now you’re under contract three months later, sure. We’re going to have to update asset documentation, stuff like that. But once we’re under contract very shortly after that, we should be fine and not have to really update anything.

Jim Duffy: Things except to your point, Josh, please don’t quit your job. In the meantime,

Jason Pitarra: don’t

Josh Lewis: quit. Don’t quit. Your job. Updating documentation is more common that if we’ve pre-approved you and it’s tough market, you may not get a house in two weeks. You might not get in six weeks. It might be 12 weeks. We’re going to need updated pay stubs, some updated bank statements, but generally.

Josh Lewis: When you’re in underwriting, you’re getting pretty close to closing. And for the most part, you won’t need to update stuff. Here’s a really important topic. I don’t want to go down the rabbit hole, but I do want to talk about, is people hear about automated underwriting? So Jason, you’ve, pre-approved someone, you got all their documentation.

Josh Lewis: You said, Hey, good news. I have an approval through the automated underwriting system. What is the difference between automated underwriting and the underwriting that we’re talking about today? And why does it matter to them?

Jason Pitarra: I’m trying to think of the politically correct way to put this crap in crap out.

Jason Pitarra: Okay. So I actually had a room per partner in our area that said, Hey, one of your competitors that she gives free qualifications in 10 minutes, he or she, we’ll just say that. And I’m like it’s not legitimate. Like you didn’t get all the documentation that an underwriter wants to read.

Jason Pitarra: You, we basically took what the, when you run an automated approval, Josh, what you’re doing is you’re just taking the data that the client tells you. And the credit that capacity, that the capital and collateral which, and we run it through. And whenever you enter into the system is what the automated approval system picks up.

Jason Pitarra: And it says if all of this is valid, you have an approval. But it’s up to review and all of those items, like an underwriter to really determine is it really. Yeah. And then

Josh Lewis: it’s helpful to understand that when we get an automated approval, it’s a preliminary, but it literally says preliminary on it.

Josh Lewis: We have to release it to the underwriter reviews, all those four elements. We talked about change the application to what they think the income is, what the payment is, what the debts are. Then they rerun it and it comes out. So the garbage, the loan officer may or may. I put in, gets cleaned by the underwriter and we get an end result that is totally validated.

Josh Lewis: So the automated underwriting is used throughout the process. And again, if you have a good loan officer experienced anyone like these three gentlemen here have been doing this 20 plus years and know what they’re doing and they’re not putting garbage in, it should be valid. We should never have a problem at the end where it doesn’t match up.

Jim Duffy: That’s a really good point. If I can jump in just for a second, a good loan originator, the three of them. Really is a pre underwriter. Cause we don’t want to waste your time. We don’t want to waste our time and we’ll guide you. If we know your loan, can’t be approved right now. We’ll always put an end to underwriting.

Jim Duffy: If you request we, we always can and will, but we’ll also guide you of, if not now, when and what do you have to do to get there? The other side of that coin though, is to your point about. The underwriter well, and Jason’s point the underwriter’s not a machine that automated underwriting is the thing that Fannie Mae and Freddie Mac came up with in early two thousands, I believe, or late nineties, the underwriters, a person.

Jim Duffy: And guess what? The guidelines are printed out. A VA guidelines a couple of years ago. And I went through them line by line and highlighted they’re about that thick double-sided. There’s a lot there and the same with FHA and the same with conventional and the same with USDA and all the loan types.

Jim Duffy: My point being sometimes underwriters make a mistake, but that’s where a good loan originator. If you’re working with someone experienced with relationships in the business, we know our underwriters and our underwriters know us, and we have a great banter type relationship. Sometimes I make mistakes and my underwriter corrects me and my I’ve had the, my underwriter make mistakes.

Jim Duffy: He or she, and we just work together because everyone recognizes we’re human. We were capable of making mistakes and sometimes we do, but we work as a team to get that loan done as well as possible. And I think that’s the key is the underwriters, just a real person who has your best interest in. But also has the company’s best interest at heart and just the two pretty

Josh Lewis: Let’s talk about something here that doesn’t happen all that often, but you have a client who meets the guidelines, but the loan does not pass automated approval.

Josh Lewis: Is there a way to work it through underwriting without an automated approval? And if so, when can that be an option? Jason, you want to jump on that one?

Jason Pitarra: So we call it a manual underwrite, the automated system, it just picking up discrepancies. It maybe doesn’t like some derogatories or some negative items on the credit and it just doesn’t render a decision.

Jason Pitarra: We call that what we call it, re manual underwriting. A lot of companies won’t do it at all. We do a ton of them. I’m sure you guys do too, but basically it’s knowing, thinking outside of the box and saying, you know what, I’m not going to decline that client because this will work on a manual underwrite.

Jason Pitarra: We just need to submit all of the documentation we’ve discussed today and get the underwriter to basically put their name on the line and sign off. And the good loan officers know when, and when not we can do

Josh Lewis: that. And an important thing to know with that in general, the manual underwriting guidelines are more restrictive.

Josh Lewis: The automated will push, let you push a little bit further. And most of the time to get that manual. Under those more restrictive guys, we need some compensating factors that have some strengths because there’s mostly, there’s something in the file that the automated doesn’t like, we have to show the human who’s going to approve it.

Josh Lewis: Yes, that’s true. But here’s why it’s an acceptable risk to the lender. Yeah.

Jim Duffy: I totally agree with that. And that’s what a manual underwrite is. So a lot of times the compensating factors can be look how much time. Eh, this person’s been on the job. It’s stability. We’ll look at the credit over the last two years before the negative stuff or after the negative stuff happened.

Jim Duffy: It’s been clean as a whistle for two years now, or there’s two months reserves right after closing. There’s the first two months of payments are in the bank, sitting there just waiting to make those payments. Those are type compensating factors. You almost always need something strong to offset something.

Jim Duffy: And that’s how a manual underwrite gets successful. But like you say, Jason, I totally agree. We do them all the time and it’s perfectly capable of doing a manual underwrite. You don’t have to go by automated underwriting, but you do have to give us something, help us out here. We’ve got to show some compensating.

Josh Lewis: So we’re closing in on an hour here. I’ve got one good last question that comes up here frequently. I’d love to run by you guys. So my loan has been approved. Does anyone else have to sign off on it? And there’s two instances where I see that this happens. It’s a loan with less than 20% down a conventional loan with less than 20% down.

Josh Lewis: Sometimes or most of the time we have a mortgage insurance underwrite. Is that any different or are we likely to have a mortgage insurance underwriter decline alone? That one of our underwriters says yes to you guys have any thoughts on that?

Jason Pitarra: I guess I’ll go. So we do all of our own delegated am I, so if we sign off on it, they were good.

Jason Pitarra: I’ve heard of situations where they could you have another underwriter signing off on the insurance, the mortgage. But I think one of the situations not to get too off topic, but one of the other ones is the compliance review. I think today 20% of all lenders have to do compliance review. I think if you’re selling to Fannie or Freddie or both, don’t hold me to that.

Jason Pitarra: Exactly. But basically one out of five loans are randomly selected for us and say, Hey, we’re going to do a QC audit, a quality control audit. And they scrub everything. The underwriter looked at to see if she missed it. Or if that background check or fraud check on the back end brings up anything that wasn’t caught.

Jason Pitarra: So that’s my

Josh Lewis: situation. Once you’ve proven that you’re mean, and prickly enough as an underwriter, they move you to a QC underwriter so that you can then review the work of other underwriters and tell them how they failed. So a hundred percent correct.

Jim Duffy: That’s a whole level down in the basement. That’s a sub.

Jim Duffy: Those people don’t

Josh Lewis: even want out of the basement. They enjoy it down there. The last one or the time where we can see a requirement for a second underwrite is some jumbo loans. Some of them just require a second signature. And that’s just because it’s a generally a bigger loan, more risk and some lenders, not all.

Josh Lewis: I want to see two underwriters putting their signatures to it. So we covered a lot of ground. It’s a big topic. We literally could take some of these chunks and do an hour just on those. But before we jump off anything that you guys think the viewers at home, the find my way home viewers should know about underwriting.

Jim Duffy: I guess I’ll jump in first. It’s not, I think we’ve covered a lot. No, that the underwriter has your best interest at heart. You being the home. And a good underwriter really wants to see you getting then home, if at all possible while at the same time, making sure that you’re going to be successful in the home ownership.

Jim Duffy: You’ve got the capacity to repay that loan and live in it longterm and be happy and create a life in that new home. But I would say. If you’re on the fence and you want to for example, I just closed a loan for a woman who’s 60 years old, first home, and she was crying at the closing table.

Jim Duffy: I almost never go to my closing scene more, but I went through this one because it was such a success and she was weeping at the closing table for joy because she said, I never thought I could buy a home. So the thing I would toss out there is if you’re on the fence of, can I ever buy a home?

Jim Duffy: Can I not? What’s the take. Call one of us. And if we’re not licensed in your state, we’ll put you in touch with one of the experts in their expert network, for sure, because we can help you. And it may not happen today. It may take six months to get ready, but that’s okay. Six months is a lot less time than 16.

Jason Pitarra: Yeah, that’s perfect. Jim. And I think Josh, I actually been working on my team for many years now of saying, don’t say, no, maybe it’s not now, but don’t say no. And I think everyone on this network is super experienced. I really truly believe some of the best and think. I wouldn’t say, sorry, but it concerns me from a borrower standpoint because they either were told yes, by an incompetent person or told no by an incompetent person.

Jason Pitarra: So who do you believe? And it’s a battle, but I think everyone on the network is someone you could try. And Hey, mistakes happen, but we’re all experienced to know what and what cannot work. And if not, we’re leaning on each other to figure that out as an experience level versus some guys say, Hey, let’s go with the cheapest guy that’s working in the cubicle, Josh that, that doesn’t have time to look at all of the things that the underwriter is going to need.

Jason Pitarra: Cause they’re doing a volume game and trying to make a couple of hundred bucks alone and do is hundreds of them and they have to move. Yeah,

Josh Lewis: hopefully that helps. No, absolutely. And I just want to leave everyone with the thought of your loan officer is the editor of your story before it gets to the underwriter.

Josh Lewis: Tell them everything. They’re not asking things to be difficult. They’re not asking things to make it hard on you. They’re wanting to have. As prettiest story as possible. So that file flies through underwriting with minimal conditions and you get the home you want with the best terms available. So again, guys, thank you for joining me.

Josh Lewis: We’ve had a great conversation. I love being part of these every week. If you’re watching at home, you have questions. We have answers. Reach out through a find my way home.com. We have a directory there of experts throughout the country. You can find someone in your area who can help and can get you the answers that you need.

Josh Lewis: So again, thanks for joining us and we’ll see you again next week.

About the Author

Scott Schang

A 20+ year veteran of the Mortgage and Real Estate industry, I am passionate about educating and empowering consumers. I have been writing about consumer protection issues and making sense of complicated real estate and mortgage topics on this website since 2007

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