Loan Underwriting – Changing Guidelines

By rerockstar • December 21st, 2009

Home Loans.

In my previous post, “Realtor® Speak 101: Loan Underwriting,” we were discussing exactly what underwriting is, but I realized I may not have covered on of the phrases you’ll hear a lot during the loan process. “Underwriting guidelines.” Depending on what type of loan you apply for, these guidelines can be very different.

Think of loans as products, each product sits on a shelf in a store. When you go to shop for a home loan, you lender acts as your personal shopper (kind of how they do it in the Apple Store). Your lender talks to you about what you want and need and they try to find the product that best suits you. Each lender works in a different store and although some stores carry the same loans, one store may have a few you’ve never seen before.

Once you and your lender have picked out the perfect loan product for you (I see you had your eye on the pink one with the sparkles all over it – nice choice) and you apply for it. The whole process begins. This is where underwriting comes in. Each loan comes with its own underwriting guidelines.

Guidelines and requirements.

Each loan has it’s own rules when it comes to underwriting. There are common threads amongst all of them, but many will ask for one thing, yet another will not. The reason? Investors. Once you take a loan, they are typically sold off to investors in bundles to investors. These investors want certain things in place so they feel safe making the investment (ie. they want to be sure the loans won’t default). In order to take some of the risk out of these investments, the investors require certain guidelines be met during the underwriting process. There are also guidelines to be met by the lender and the particular loan product you have chosen.

You’ve probably heard that underwriting guidelines have become much more strict recently and this is very true. For instance, FHA loans do not have any minimum credit score guidelines (although the FHA is looking into changing that). This is what always made FHA loans so attractive to many people. The guidelines didn’t require you to have a specific credit score, so for some people, this was the best route to a home loan.

After the housing market mess started to clear, investors realized that buying loans with no requirements for a minimum credit score seemed very risky. So they changed the rules. Now, in order for your FHA loan to be bought by investors, you must meet certain credit score guidelines that they have set. So when the underwriter is working on your file, they know not only what the requirements are for your particular lender are, but they also have sets of guidelines for the various investors they sell loans to.

So what are the guidelines then?

Ask any lender today what their underwriter’s guidelines are and write it down. Then, a week later (sometimes even days or hours), ask them again. You probably won’t get the exact same answer. Underwriting guidelines change constantly. Whether the new guidelines are handed down from the investors, the federal government (FHA and VA especially), or your lender; they will and can change. Some of the guidelines are followed as if they were law. Some are completely ignored. When HUD wanted to monetize the First Time Home Buyer Tax Credit to enable home buyers to use it as a down payment, lenders largely laughed at the idea of it, as they say it was too risky for them. (Note: It is possible to use it as part of your down payment, but you still need 3.5% of your own cash in order to do so – they basically only allow it as an additional down payment and most lenders won’t even do that.)

Your best bet to being approved for a loan and passing through underwriting without a hitch? Keep your credit scores as high as you can. Have cash reserves (savings). Document everything the underwriter asks for. Don’t apply for any new credit or run up your credit cards during the home buying process. These four things alone will make the process of underwriting run a lot smoother and increase your chances of getting the loan and closing on your new home.

photo courtesy of TheTruthAbout…