Guys,
Have a little mercy on the UW's. The guidelines they have to follow are convoluted. For example, for schedule C income, the lender I worked for required a specific internal spreadsheet to be used on all files where the UW just plugged in data and it spit out a number for the monthly income. One problem-technically you are allowed to add back mileage reimbursement, but there wasn't a spot for that, and nothing in the guidelines specifically stated you could add it back in. It took calling a senior manager to have them send an email to the legal department(because only that manager was allowed to escalate questions to legal) so that they could confirm that yes, it could be added back in, then another set of emails to confirm how much reimbursement per mile they would allow(and it varied depending on the year).
(see attached Venn diagram).
Most lenders sell their conventional loans to both Freddie Mac(Red) or Fannie Mae(Blue). However, each of these two organizations has slightly different requirements. Sometimes they match, sometimes one or the other will be more conservative. Many banks(Green) also have applied their own sets of requirements(often called ‘overlays’) that they want met as they have decided loans that do not meet these are at higher risk of default. Because of this, the sweet spot for a conventional loan is one that meets the most conservative guidelines of the all three(#1 on diagram). This loan can be sold anywhere and is considered extremely low risk.
Frequently a loan will meet the banks and one agencies requirements (#2 on diagrams). In this case, the UW will submit what is called a directing or tracking exception. This is a way to flag the loan to show that it can only be sold to either Fannie or Freddie, depending on who will approve it. This usually is not a problem unless the loan then required a 2nd tracking exception directing it to the other agency. In this case, unless one of the items can be resolved, the loan is not approvable.
Sometimes, a loan will not meet the banks internal requirements even though one or the other of the agencies deem it acceptable(#3 on diagrams). In this case, the UW will submit for a exception to get approval from the specific agency. These loans are generally deemed significantly higher risk. As with tracking exceptions, if it required a separate exception or tracking exception to be submitted to the other agency, loan is not approvable. A loan submitted for an exception generally requires a higher level UW to review it and submit it, and then, once submitted, an even higher level UW to review and approve the exception, before it goes back to the original UW to complete the rest of the process. As you can imagine, this can add delays to the process.
Some of the larger banks will also hold loans as part of their own portfolio(#4 on diagrams). Generally referred to as ‘Non-conforming’ These loans are usually not sold to the agencies. These generally are for borrowers who own multiple financed properties(over 10), have lots of assets(usually over $1 Million), and frequently have multiple businesses. These loans are very complex and usually have very long turn times(closing in 30 days is likely a pipe dream, 90-180 days is much more common).
Guidelines and Risk Tolerance:
The guidelines that each agency provides are very general, which is helpful in one regard as it would be hugely and horribly cumbersome to try to give guidelines that cover every scenario. Unfortunately, this means that depending on the UW you have, you may be held to either more conservative or more liberal interpretations.
This can also mean certain items are not addressed and unless the UW knows to look for it, it may not be done. EX: Schedule C Businesses: Mileage can be added back to the qualifying income calculation, however neither Fannie or Freddie explicitly state this in their guidelines, and the amount you can credit per mile varies based on the year. Unless the UW knows this, you may not be credited with all the income you should be.
‘Why didn’t you ask for that up front?’ is probably the most common complaint an UW hears.
As mentioned above, there are multiple agency and bank guidelines that impact a loan. When a loan is submitted it is run through an Automated Underwriting System(AUS) that assigns a basic risk level, which determines what level of Underwriter is assigned to the file. Fannie Mae and Freddie Mac each have their own proprietary underwriting systems (Desktop Underwriter(DU) and Loan Prospector(LP)). Depending on the data that is originally entered a loan is assigned a risk level of 1, 2 or 3. A level one UW can only underwrite level 1 files, a level 2 UW can do level 2 and level 1. A level 3 UW can do them all. As the Underwriter makes changes based on the documentation submitted the level of the review can go up or down. If it goes up, it may have to get reassigned to a new UW, who is then required to review EVERYTHING that the previous UW reviewed again to make sure it still complies with guidelines.
EX: A common scenario is for a loan to come in at a level 1, but during review of the bank statements, they notice the borrower has a small Schedule C business that was not disclosed. This automatically puts the loan up to a level 2(as they have to determine the business does not negatively impact the file), even if the income is not used. When a loan is reassigned to a higher level UW, they do not just review the item in question(in this case the tax returns), they will reunderwrite the entire file because if anything was missed, they are now the UW of record so it is their responsibility, also, well some of the other documentation was acceptable when the loan was deemed low risk, now that it is a higher risk, it may no longer be allowed.
A secondary reason you may get asked for something later is due to what was noted previously under ‘Guidelines and Risk Tolerances’. The guidelines are vague, and it is very common for a bank to have been interpreting a guideline one way but for either the agencies to come back and issue a clarification, or for the banks legal department to issue new guidance for how they want it applied. When this happens, it impacts all the loans in the pipeline, regardless of if they were just received in, or in process for a month. Depending on the change, even if a loan was clear to close, it may no longer be.
Things that can change risk levels:
Undisclosed businesses-see example above.
Changes in Debt to income ratios- as ratios increase, risk levels can increase. Often, this is a process that goes on behind the scenes and the UW has no control over it. A common issue is loans not coming over showing HOA dues. When these are added it can swing the ratios substantially(especially if say a Condo used as a 2nd home in Vail).
Changes in income types-This one is critical for FIRE’d folks. If you are doing ‘Asset Dissipation’, aka, using withdrawals of assets from retirement or bank accounts in lieu of income, this will automatically require a higher level UW. If the income type was entered incorrectly, the AUS doesn’t read it, so if entered as ‘Pension income’ vs ‘Asset Dissipation’ you get very different results. Pension income would be a level 1, Asset Dissipation is a level 3.
-Tip, Bonus and Overtime income: These requires 2 years w2’s or a Written Verification of Employment(WVOE) from the employer. Often a loan will only require one years w2 until it is found this is needed.
Changes in type of property- Often a loan will be submitted as the wrong type of property: A condo submitted as a single family, a mobile home submitted as stick built, ect.
Changes in loan type: EX: A loan is submitted as a purchase of a primary residence, but after talking to the borrower, they plan on remaining at their current residence until they retire in 5 yrs, in the mean time they plan on renting it out. In this scenario, the loan should have been submitted as an investment property. This can have a huge impact as 1). The current residence is being retained, not sold, so they have to qualify with both payments, and 2). An investment property requires 6 months reserves vs a primary which requires 0.
Adding a Tracking exception or exception-See Venn diagram #2 and 3 above.
Changes in assets remaining after closing- Often, if the amount the borrower has left after closing decreases(especially if falls under 2 months PITI(Principal, interest, taxes, Insurance and HOA dues)) the loan can increase to a higher risk level. Like with changes in DTI, this can be an automatic process based on what the AUS has decided constitutes a higher risk and the UW is left scrambling to get additional documents at the 11th hr.
Now, don't get me wrong, there are many UW's who don't do a good job or who just throw everything back on the borrower without picking up the phone and calling the insurance company, title or county and getting the documents themselves. But the majority are trying to do the best within a framework that isn't easy to navigate.
The other issue is that mortgage is a very cyclical industry. It has boom and bust periods. When it is bust, most lenders lay off a large as many as they can get away with to cut costs. However, this means when the cycle is back to Boom times, they have to hire back employees. Sometimes they can get the laid off, experienced UW's back, but every time I've seen a massive hiring boom, most are very green and have little or no experience-I know for a fact that one of the people hired by the bank I worked for had no mortgage experience and had previously worked at a hotdog stand(No, I am not making that up....). These people then have to be trained and with training they only get the very basics and are expected to pick the rest up as they go.
