As proposed in a November 30, 2009, proposed rule (74 FR 62521), HUD is seeking to eliminate FHA approval for loan correspondents. Because this rulemaking is still in process and a final rule has not yet been issued, FHA is extending the deadline for the submission of audited financial statements for loan correspondents seeking renewal of their FHA lender approval for 2010. For loan correspondents with a fiscal year end of December 31, and that would ordinarily be required to renew their FHA approval by March 31, 2010, HUD is providing these lenders with an additional 30 days in which to submit their audited financial statements. These loan correspondents must continue to comply with existing requirements for the submission of their Annual Certifications and renewal fees, but will be given until April 30, 2010, to submit audited financial statements. Again, the deadline for the submission of the Annual Certification and renewal fee has not been changed. Loan correspondents that do not complete their renewal in accordance with the deadlines as specified above will no longer be FHA-approved as of the effective date of the final rule that follows the November 30, 2009, proposed rule.

Here is the text of an email sent out today by the Nehemiah Corporation, the largest of the down payment assistance groups:

Dear Friend,

I am turning to you in the 11th hour, urging you to take action to oppose a
housing bill that will eliminate downpayment assistance. The Senate and House of
Representatives are fast-tracking this bill. See the Washington Post article
below. Upon the President’s signature, downpayment assistance will be shut down
in the United States. Failure to act now will ensure the immediate death of
downpayment assistance.

In recent weeks, I have come to you requesting your help in defeating HUD in
their attempt to eliminate downpayment assistance. HUD and the Senate are now
attempting to ci rcumvent the rule making process by going after downpayment
assistance via legislation. This course of action is being pursued in spite of
the strong support of the Congressional Black Caucus, the Congressional Hispanic
Caucus, the U.S. Conference of Mayors and Congresswoman Maxine Waters.

The consequences will be devastating! By FHA’s own estimates, DPA comprises
nearly 40% of FHA’s volume. This means more than 300,000 working class families
will be locked out of homeownership in the next year alone. Communities across
America will take the brunt of the $50 billion in lost real estate sales, not to
mention the indirect impact on the real estate, mortgage and building sectors
that will be forced to shed tens of thousands of jobs due to this dangerous
legislation.

Act now! Please call your Congressional Representative, Senators, trade
associations and community groups IMMEDIATELY to voice your support for
downpayment assistance and your opposition to this bill. Urge your legislators
to oppose these provisions that would ravage your local economy by bringing the
housing sector to a screeching halt.

Locate your elected officials.

1. Enter Your Zip Code and click “Go”.
2. Click on the link of the Representative you would like to call and then click
on the Contact tab to find their Washington D.C. office phone number.

Sincerely,
Scott C. Syphax
President & CEO
Nehemiah Corporation of America

For those interested, the website Nehemiah has set up to help locate and contact your Representative is located here.

Given HUD’s early June 2008 announcement that it had to withdraw $4.6 billion in May from capital reserve fund to cover unexpectedly high losses which HUD (with bad reasoning in my opinion) blames on down payment assistance programs, I am 100% in favor of driving as many good FHA loans into the system as possible in order to offset the negative effects of those defaults.

FHA approved lenders should be making similar efforts instead of directing all their marketing toward troubled credit borrowers. There are many cases where FHA insured mortgages beat conventional scenarios now for loans above 80% of the home’s value – even for good credit borrowers.

For those interested, here is the text of HUD’s letter to “at risk” borrowers:

Dear Homeowner,

Do you need help with your mortgage?

Your area is experiencing a disturbing home foreclosure rate that has accelerated in recent months. News reports cite the damaging effects of “sub prime loans” as a major factor in the unsettled market. By focusing on education and safe mortgage alternatives, though, the Federal Housing Administration (FHA) of the United States Department of Housing and Urban Development (HUD) is working diligently to address this unacceptable foreclosure trend.

Over the past few months, FHA has worked with mortgage loan servicers to identify solutions for the crisis facing current homeowners. Your current mortgage does not have to be FHA insured for you to benefit from our help. If you are facing financial difficulties due to a recent or imminent mortgage reset, or other housing-related difficulty, I urge you to contact us at 1 (800) CALL-FHA. There you will have the opportunity to learn about foreclosure prevention, legal rights, and credit counseling, among other topics.

Many homeowners may also be able to take advantage of our recently announced FHASecure program. This new program allows eligible homeowners to refinance into a secure, fixed-rate FHA loan even if they are in default.

Additionally, a new partnership between mortgage companies and non-profit housing counselors called HOPE NOW is available to you. Their mission is simple: reach out to homeowners who may be having difficulty paying their mortgages. For more information or to see if your mortgage company is a member of this caring coalition please go to www.hopenow.com.

Again, please contact us at 1 (800) CALL-FHA (800-225-5342). As part of the federal government, the Federal Housing Administration wants to help you protect and preserve the American dream – your home.

Sincerely,

Brian D. Montgomery
Assistant Secretary for Housing
Federal Housing Commissioner

Now if we could just get HUD to look at some of the real causes of these losses, like FHA TOTAL Scorecard allowing debt ratios that are far too high for people in real life to sustain – a problem I plan to address in another post – then maybe FHA could really avoid having to tap into the insurance fund in the future.

On Friday, June 20, 2008 HUD issued an official Mortgagee Letter 08-17 which further clarifies the policy. Once again HUD has made it clear that a non-approved mortgage broker cannot receive any fee for the processing and origination of an FHA insured mortgage. Quoting from the Mortgagee Letter, HUD outlines the services which a non-approved mortgage broker cannot be paid and which must be performed by the FHA approved mortgagee as:

• taking information from the borrower and filling out the loan application;
• determining whether the property is in a flood zone or ordering such service.
• ordering legal documents; and
• collecting financial information (tax returns, bank statements) and other related documents that are part of the application process;
• initiating/ordering Verifications of Employment and Deposit;
• initiating/ordering request for mortgage and other loan verifications;
• initiating/ordering appraisals;
• initiating/ordering inspections or engineering reports;
• providing disclosures (truth in lending, good faith estimate and others) to the borrower(s);
• maintaining regular contact with the borrower, real estate professional, and lender between loan application and closing to apprise them of the status of the application and gather any additional information needed;

HUD does allow non-approved mortgage brokers to receive fees for counseling the borrower under certain circumstances as long as that counseling is meaningful and does not constitute “steering”. Also from the Mortgagee Letter, HUD lists some of the services which might fall under the category of counseling. These are: educating prospective borrowers in the home buying and financing process, advising the borrower about different types of loan products available, and demonstrating how closing costs and monthly payment could vary under each product.

HUD is also very specific about some of the important attributes that must exist in order for HUD to consider the non-approved mortgage broker’s counseling services as authentic. Those attributes are: (1) counseling gave the borrower the opportunity to consider products from at least three different lenders; (2) the entity performing the counseling would receive the same compensation regardless of which lender’s product were ultimately selected; and (3) any payment made for the “counseling type” services is reasonably related to the services performed.

Further, HUD requires that the fee for such services be paid from the borrower’s own available assets and the fee must be reasonably related to the actual services performed. Given that the services outlined are widely available in the marketplace for free, I will leave it up to the reader to determine what they might feel is reasonable. In my opinion, though, a non-approved mortgage broker receiving 2% of the loan amount while the borrower is referred to only one lender which charges them an interest rate paying 3.5% to 4% in yield spread premium from the wholesale lenders is probably not what HUD has in mind.

It is also my suspicion that finally “reminding” us of this in an official Mortgagee Letter is most likely official notice that HUD is preparing to crack some heads over the issue. In the Mortgage Letter HUD is very specific in stating that “If the payment bears no reasonable relationship to the market value of the services provided, the excess over the market rate may be used as evidence of a compensated referral or unearned fee in violation of section 8(a) or (b) of RESPA and 24 CFR 3500.14(g).”

This may sound harsh, but divorce is not a good excuse for bad credit.

Considering the number of credit explanation letters I see in FHA loan submissions which prominently promote divorce as the explanation for borrowers’ credit foul-ups, it appears clear to me that many loan officers are not aware of this fact. As a result, many loan submission files end up unnecessarily in the turn-down stack.

I know that divorce is very frequently associated with the bad credit showing on many borrowers’ credit reports. I also know that just as frequently, the dates and times coincide between the bad credit and the divorce as well. How then, you ask, can the borrower get a mortgage?

Here are two tactics to possibly deal with the problem.

1. Get an automated approval.

Of course, this is the most obvious answer. No credit explanations are required when an automated approval through FHA Total Scorecard exists. Easier said than done, though, when the borrower has low credit scores. But before you go asking the borrower for more documentation, make sure that you are submitting the loan to FHA Total Scorecard with very accurate and complete information. In particular, be sure to include all of the borrowers assets that fit into the rules. Assets can often make the difference between an approval and a referral to the underwriter. However, most of the time this first option does not work out if any of the bad credit occurred recently.

2. Be nosy. Ask the borrower a lot more questions.

You may have to dig into the borrowers privacy almost to the point that you start to make them angry. Unfortunately, you cannot help them without more information. Here’s why. Divorce may not be a good excuse for bad credit – but the reason behind the divorce is usually a very acceptable excuse.

Many borrowers are reluctant to talk about the details because they tend to be emotionally painful. But if you take the time to explain your motivation to them, you can usually get enough background information to locate a real excuse. There are often painful details such as an alcoholic spouse, or a drug problem, or an ex-spouse that was laid off or just couldn’t hold a job for one reason or another. Problems for which the divorce was actually a solution.

The key to getting a borrower who has had credit problems approved for an FHA loan is to have a documented reason for the credit problems, some evidence that the problem has been solved, and a plan for making sure the problem doesn’t reoccur. The more recent the credit problem, the better the excuse must be. When you have the borrower compose their explanation letter from the point of view of the problems that led to the divorce being their excuse, with the divorce being the solution to the problem, you have vastly increased the chances for loan approval. As difficult as it is, the borrower absolutely must explain the painful details of why they had to divorce their former spouse without leaving much out. This is the only way the underwriter is going to be able to look at the problem as having been beyond the borrowers’ control, and as a problem that has been solved.

A Few Caveats

Over the last few posts, I have been giving some tips on how to get FHA loans approved that may sound alien to many loan originators who have entered the mortgage business since the advent of automated underwriting. In many cases, these tips might even surprise FHA underwriters who entered the business during the same time period!

As a reaction to the ongoing credit crisis, many underwriters with less experience are very naturally and understandably leaning toward the safe side of decision making as a defense mechanism against the present onslaught of poorly processed files. This won’t last forever and not every underwriter is doing so now. In other words, if you are a mortgage broker you may have to carefully measure which lender you submit your file to. Right now, some of the less prominent lenders might be more likely to consider a good explanation letter.

You are also going to have to carefully balance your own situation. If you have in-house underwriters and they don’t want to see tough loans, just save up these techniques for later and spend your time marketing for more loans rather than fighting with your underwriters. On the other side, if your underwriters are willing to consider extenuating circumstances or you are a mortgage broker with more choices, don’t take that as an opportunity to try to work the system and get every bad credit borrower you find into an FHA loan. With experience, you will start to recognize the borrowers who truly do deserve a loan now. Counsel the others on how to improve their credit picture and buy a home later, but do not waste their time and yours tilting at windmills trying to get a mortgage for them before they are really ready. When originating FHA loans you should make sure the new mortgage is really a benefit to that borrower.

Good news! HUD has finally come out with a Mortgagee Letter on April 29, 2008 that specifically addresses all the requirements. I encourage everyone to be sure to read it thoroughly.

Among the highlights, HUD divides credit accounts into two groups and specifies that they want to see a 12 month history. Group One includes rental payments and utilities. Group Two includes accounts such as insurance, service providers, school tuition etc. The Mortgagee letter also goes into detail how these accounts should be verified, how many late payments are allowed (yes, some are!) and when cancelled checks are required. I won’t simply rewrite it here, since for once the Mortgagee Letter seems to be extremely clear.

The most important clarification, or change, is that if all your borrower’s credit references come from Group Two, you cannot apply any compensating factors and debt ratios must remain under 31/43. In addition, borrowers must have 2 months cash reserves which cannot be a gift. These two are probably the items most likely to affect current loans in your pipeline.

I’m about to place in your hands one of the most powerful tools there is to make sure you get your loans approved by FHA underwriters – the ability to excel at packaging a loan submission.

First things first. These tips are worthless without the proper foundation. Here’s that foundation in one sentence: Make sure you have a borrower who really deserves a loan!

I know loan officers think everyone who wants a home deserves a loan as long as there is any way to squeeze them into the FHA guidelines. Use common sense though. Make sure you really do believe someone will be able to make the payments before you go out of your way to get a mortgage approved for them.

Don’t use the typical excuses so common during the mortgage boom years that you “aren’t their parent” or “it’s up to them to know whether they can make the payments” or “they’ll just go on to someone else.” These excuses are a prime reason that today you are having to fight tooth and nail to get loans approved that were once easy to close.

I’m not telling you all your customers must have pristine credit. I am saying you should not be helping deadbeats who haven’t changed their habits, but want a home because “they are tired of throwing their money away on rent.” Market yourself better and find the people who really did have an unexpected problem ruin their credit and who have learned their lesson. Remember FHA will cut you off from the program if you allow too many deadbeats through your filter anyway.

With that in mind, here are 3 power tips for writing an effective FHA credit explanation letter.

Tip Number 1: Don’t write the credit letter. Let the borrower put it in their own words.

Probably not what you were expecting, but this is very important. A perfect letter put together completely by the loan officer can easily be detected by the underwriter and it will hold less weight when they see it. Allow the borrower’s own words and own personality to make their way into the letter.

Tip Number 2: Don’t leave the borrower completely on their own to write the letter.

Most loan officers still simply give the borrower a list of derogatory accounts and ask them to explain them. Don’t do that. Give your borrower the proper guidance. Tell them what you expect from them.

Sadly, the average high school graduate today is functionally illiterate when it comes to the task of putting together such a letter. You are doing good people a disservice when you leave it all up to them. They could probably do a fine job of explaining it themselves if they were speaking directly to the underwriter and the underwriter could ask follow up questions. That doesn’t happen anymore, so you must help them get it right from the beginning.

After the borrower explains the details of the situation which caused their credit problems and you have informed them that it is a crime to lie in this instance, have them write out exactly why the problems happened. Make sure they address and account for every single negative item on the credit report no matter how old or how insignificant it appears. Get them to explain in their own words why they feel this problem won’t happen again and exactly what they have changed in their life to prevent it from doing so. Then have them explain why they feel the underwriter should reasonably expect them to be able to make the payments.

Don’t skip any of those points. Once the borrower understands what is needed, let them put it in their own words.

Many loan officers tell their borrowers to keep their explanation letter short. Don’t fall into this trap. Make sure the borrower explains everything in tedious detail to the point that anyone who picks up that loan file 10 years from now can easily understand why this borrower ended up being approved.

Here’s a bonus tip: To satisfy the underwriters who don’t like to read, always include your own cover letter in the submission file briefly summarizing the borrower’s credit explanation and adding your own interpretation of which compensating factors the underwriter should consider.

When you structure the explanation part of your file this way, you are helping the underwriters make the decision without having to figure out on their own how they are going to justify it. This makes them more comfortable giving you an approval with fewer conditions.

Tip Number 3: Document the borrower’s credit explanation and solution.

This is the extra punch even experienced loan officers often leave out, but it is the step which can take you above the level of the average loan officer into the category of miracle worker in the eyes of your borrower and their real estate agents.

Get some documentation to prove the borrower’s credit explanation is true and that their explanation of how they have changed things is true. I know this involves extra work for you and for the borrower. It is worth it. If the borrower had a medical problem get something from the doctor, or include bills in the file. If the borrower was laid off, include a copy of their termination letter or evidence of receipt of unemployment benefits. If the borrower said their problems occurred because they had no medical insurance, prove they have it now. You get the idea.

Of course the borrowers often have difficulty finding this type documentation. That’s why the average loan officer never gets it. Push them. It doesn’t take much documentation to add considerable punch to your case that the loan should be approved.

Every day I talk to loan officers crying over turned down files that should have been approved. The common element in almost all of these cases is that the loan officer left it up to the underwriter to figure out why the loan should be approved. To avoid extra work which might be wasted, loan officers submit the loan hoping it will slip through without having to provide this documentation. Underwriters don’t have time for this. When you put them in this position their answer will be to turn the loan down or approve it with approximately four thousand conditions of approval.

Times are difficult in the mortgage industry today. The mortgage originators who survive will be those who find a way to help the people other originators aren’t helping. Becoming an expert on FHA loans can be the best way for a loan officer to do that. Use these tips to get more loans approved and get more referrals from your happy customers.

The very best way to make your mortgage marketing successful is to concentrate it on a very tightly defined niche and position yourself as the expert in that niche. Borrowers aren’t attracted to those one size fits all ads and you are throwing away your money.

Here are three niches that an FHA mortgage specialist can use to close more loans in less time with more profit and, most importantly, happier customers that are anxious to refer their friends and relatives.

1. First Time Home Buyers.

This is the most obvious FHA niche market. After all, this was the reason the FHA program was created in the first place. In spite of what you hear in the news, a housing downturn presents the best time for smart and well advised first time home buyers to enter the market.

The key to marketing to first time buyers is to understand that they need a lot of information and guidance before they trust. Study their needs in today’s market. Those needs are a little different than they were during the boom times.

Create a free report that shows how FHA mortgages can help meet those needs and put that home buyer in a position to profit when real estate values start rising again – as they always do. Create a series of follow-up letters and reports that you can send out over time. Get their email addresses and set up an automatic series of emails that can be sent out to them over a long period of time. Educate them and they will trust you.

2. Manufactured Home Refinances and Purchases

This is actually 2 niches in one and each category has slightly different needs. They are both high on the list of the most lucrative FHA markets that exist. This is because potential borrowers in these 2 areas have problems that the FHA loan program provides a better solution for than they are getting elsewhere.

Get set up with some of the lenders still offering FHA financing on manufactured homes and become a master at knowing what loan characteristics those lenders prefer. In spite of tightening guidelines, this market is still huge. Locate reputable local structural engineers and foundation contractors to help you quickly determine whether a manufactured home qualifies for FHA financing or what it will take to get it there.

Then, if you want to enter the manufactured home purchase market, get in contact with manufactured home dealers and offer them a solution to help get their homes sold. Use the same free report techniques to market your services directly to buyers. Use those buyers to help establish a relationship with some of those dealers.

You can enter the manufactured home market and have fewer parties to keep happy by locating owner financed manufactured homes in your area. In some parts of the country, many investors bought renovated and owner financed or lease purchased FHA qualified manufactured homes during the housing boom of the last few years. These loans often included very high interest rates and balloon notes which the buyer must pay off soon. You can often locate these situations through the local tax records. Keep in mind that if locating them was easy, this technique wouldn’t be as profitable. A mortgage originator who has mastered the process of getting manufactured home loans approved can really help these people out of a tough situation and get paid well doing it.

3. Cash Out Debt Consolidations – With A Twist

I know every subprime call center on earth has been pounding these prospects with solicitations, and taking advantage of them, for years. Yet there is a growing group of consumers who are now realizing that they need to get rid of the debt in their lives if they ever want to make it through tough economic times. These people are very wary of mortgage brokers calling them to try to lower their payments using some sort of subprime teaser rate mortgage that traps them in a bad situation later on.

In fact, if they watch the news much, potential borrowers think every mortgage broker they meet is skillfully hiding his or her horns, tail and pitchfork long enough to get that borrower’s signature on the contract selling their soul. Here is a strategy that might help get around that predisposition.

This subset of home owners who wish to get rid of debt as quickly as possible is already prepared to cut back their lifestyle in order to pay off debt. Unfortunately, a lot of their debt has crazy high interest rates. How much better might their situation be if all that debt was refinanced into one 15 year fixed rate mortgage. Yes, you did read that correctly. I’m talking about probably raising their payment. However, if they qualify I’m also talking about lowering the interest rate on that debt so they can get it paid off without the interest eating up all the payments they are making.

These are just a few of many possible niches still available to loan originators today. The mistake most mortgage brokers and lenders make is that they never realize that a specifically targeted advertisement will always draw in more prospects than those one size fits all ads they are running now. Surprisingly, marketing tests show that specific ads perform even better at drawing in prospects they were not even targeted for than general ads do.

1. Make sure the loan you are submitting makes common sense.

Incredibly, this is one of the most common mistakes made by originators who entered the mortgage business within the last 5 to 7 years. Subprime programs generally only required that the loan fit into their matrix and never cared about the reasons the person had credit problems. Make sure that you can verbalize a good case that it makes sense to believe that this borrower can reasonably be expected to make the payments on the loan. Often this requires asking a lot of uncomfortable questions of the borrower to make sure that you truly understand their situation. Even when your submission is approved by the automated underwriting system and theoretically the underwriter needs only to validate the information and not make a credit decision, the underwriter may well find something wrong if the loan does not make common sense. Lenders are held accountable by HUD for loans that default. They can always find a reason to override the automated underwriting findings if they want to.

Stating a good case for loan approval is even more important when the FHA Total Scorecard underwriting system has referred your loan to an underwriter to make the decision. Do not ever assume that just because the debt to income ratios meet guidelines and the borrower hasn’t been late on any payments in the last 12 months that you don’t need to submit a well constructed cover letter with your loan – in addition to the borrower’s own credit explanation. Make sure that both your cover letter and the borrower’s explanation fully account for what happened to cause the borrower to have credit problems and why the underwriter should now believe that the borrower has solved the problem.

Loan officers who “grew up” in the days of subprime lending based on credit scores and matrices often foolishly leave it up to the underwriter to probe through a huge stack of papers in the submission to come up with their own justification for approving the loan. Rest assured that the underwriter is too busy to do that and will only gripe about you to their colleagues after they give you an approval with a stack of conditions which are often impossible to comply with. This is one of the most common rookie causes for real estate closing delays. Let the underwriters know what you want them to base their decision on and you stand a greater chance of getting an easy approval with conditions you can comply with.

2. Check the CAIVRS number before processing the loan.

CAIVRS stands for Credit Alert Interactive Voice Response System. Don’t ask me why HUD sometimes transposes that to CAVIRS instead of CAIVRS in their own documentation. I guess it sometimes serves their purposes to keep the public confused?

The CAIVRS system verifies that the borrower has not been disqualified from using government insured financing because of past defaulted FHA/VA mortgages, student loans, or any of several other reasons. An amazing number of people are not aware that they have officially been excluded from FHA financing. This commonly happens due to “charged off” student loans that the borrower may have long forgotten about and which also do not show up on their credit report any longer. Just slightly less common are cases where the borrower’s ex-spouse was foreclosed upon and the borrower says they were not even aware of the situation. Strangely, even this fails to show up on the borrower’s credit report fairly often.

Whatever your company’s procedures, make sure you check the CAIVRS as early as possible.

3. Collect all the correct documents.

Make sure you have documentation to support the information you entered into the automated underwriting system, or that was mentioned in your cover letter and the borrower’s explanation letter. Surprisingly again, many loan originators fail to think ahead strategically when compiling their loan submission package. Loans which started out with an approval from FHA Total Scorecard often revert while in process to a “referred to underwriter” status.

First, this would occur much less often if originators took the extra few minutes necessary to verify the information being submitted by examining original paystubs, W2s, divorce decrees, bankruptcy filings and other support documentation before turning the loan over to their processor.

Second, if the loan is later unexpectedly downgraded to refer status, much more documentation is needed.

Here are a few quick but painful examples of that.

When there is no valid automated approval the borrower’s rental history must be verified. I have seen many loans fall through at this stage because the loan officer failed to even ask the borrower if their rent had been paid on time! Remember, the rental history is not a factor if the loan is approved by automated underwriting because that history is not shown on a borrower’s credit report.

Another common version of this problem occurs when the loan officer fails to examine documentation showing that extra income (for example, child support payments) has been received consistently in the past and that payment is going to continue. Again, the loan ends up falling apart well into the processing stage, leading to much greater frustration and anger from borrowers and real estate agents thus disappointed.

An equally common mistake is not verifying that a retirement account submitted on the application as an asset can legally be liquidated if necessary. For example, many teachers have substantial funds in their retirement accounts, but these funds often can not be liquidated unless the teacher is fired or dies. These funds are not considered to be liquid assets but many rookie loan officers get automated approvals based on these funds which subsequently go down in flames.

4. Compute the income accurately.

Sounds obvious, I know, but tales of mortgage closings which fall through because the borrower’s ratio of debt to income is too high are legion among real estate agents as they swear to never use that particular mortgage broker or lender again. Real estate agents and borrowers are reasonably amazed that such a basic element of the loan approval process could have slipped by the mortgage originator’s attention until so late in the process.

Here’s what happened. The loan officer asked the borrower “How much do you make?”. The borrower told them an amount from their last paycheck, or worse an amount from their best paycheck. The loan officer submitted the loan through automated underwriting and received an approval so they told the agents and borrower to go ahead with their purchase offer only to find out after finalization of the purchase contract that 30% of the borrower’s income comes from overtime pay they have only been receiving for the last year. Oops, this doesn’t fit into FHA guidelines. Alternatively, the loan officer does look at the borrowers paycheck ahead of time, but fails to note that part of the gross pay comes from overtime or bonus pay or commission pay. So the originator submits the gross income, but it isn’t entered into the system correctly and factors such as commission income actually play an important part in the automated systems risk analysis of the loan. Either way the result is not good for the parties involved.

One effective strategy to prevent this is to be very conservative in determining the borrower’s qualifying income and not count bonuses and overtime pay when submitting the loan for automated approval unless absolutely necessary. If the borrower has been qualified with less than the maximum income that can be squeezed into the loan officer’s calculations, unpleasant surprises are less likely to occur.

5. Be sure you have ALL the borrowers assets listed and listed correctly.

Loan officers frequently fail to gather complete information on all the borrower’s assets once they have an automated approval. Once again, automated approvals are downgraded to “referred to underwriter” status fairly frequently for many strange and different reasons. A good strategy for the mortgage originator is to gather documentation for every dime in every account the borrower has squirreled away anywhere, but submit the loan through the automated underwriting system with the fewest assets necessary to get an approval. When the loan is downgraded later on, the extra assets can often save the loan officer’s reputation.

Another common mistake regarding assets has already been mentioned. The assets must be verifiably liquid. For this reason, FHA guidelines require that the loan file include proof that the assets would be available to the borrower without being fired or dying. In addition, due to potential withdrawal penalties, FHA loan guidelines will allow only 60% of the vested amount of the account to be counted towards the borrower’s liquid reserves. Frequently, the entire balance has been submitted into the automated underwriting system.

These 5 tips won’t guarantee your deal will go through underwriting without a hitch. After all, FHA guidelines seem to change daily now, but a little attention to these details will go a long way toward improving your reputation among borrowers and real estate agents.

I’d love to hear more tips, traps and problems to watch out for from the originators, underwriters and managers in the trenches.