How Loan Officers Qualify Borrowers?
This Blog On How Loan Officers Qualify Borrowers Was Written By Nicholas Ferrante Of The Gustan Cho Team At CrossCountry Mortgage
How Loan Officers Qualify Borrowers:
- The Pre-Approval Process is the most important stage of the mortgage process and the number one reason why borrowers get a last minute loan denial by the underwriter is because the loan officer did not properly qualify the borrower.
- The mortgage business is quite complex and it takes time for a loan officer to become an expert with the various mortgage guidelines and case scenarios that are presented to them.
- Every mortgage case scenario can be different depending on the borrower’s credit and income issues.
- Loan Officers are not just faced with being familiar with the various mortgage lending guidelines by FHA, VA, USDA, Fannie Mae, and Freddie Mac, but they also need to know their employer’s investor overlays.
- Each lender have their own lender overlays. Lender overlays are mortgage requirements that are above and beyond the minimum federal lending guidelines.
- Just because a borrower meets the minimum HUD FHA Guidelines does not mean that they will get qualified with all FHA approved mortgage lenders.
- For example, FHA requires that a borrower need to have a 580 FICO credit score to qualify for a 3.5% down payment FHA insured mortgage loan. However, a lender does not have to lend with a borrower who applies with them with a 580 FICO credit score.
- Most mortgage lender do have overlays on credit scores and will require a higher credit score than the minimum 580 FICO credit score required by FHA.
- Most banks will require a 640 FICO credit score, while some mortgage companies will go down to a 620 FICO credit score.
- There are lenders who will go down to 580 FICO credit scores like the mortgage company I represent.
- FHA allows borrowers with under 580 FICO credit scores to qualify for FHA Loans, however, 10% down payment is required.
- The Gustan Cho Team at CrossCountry Mortgage will qualify borrowers with credit scores down to 500 FICO, however, besides the 10% down payment, compensating factors is expected with borrowers with low credit scores.
Initial Interview Between Loan Officer And Borrower
How Loan Officers Qualify Borrowers? The initial interview:
- The first stage in getting pre-qualified and pre-approved for a home loan is by the first interview between borrower and loan officer.
- The loan officer will ask borrowers a series of questions prior to taking their loan application and running credit.
- First important question the loan officer ask the borrower, especially if the borrower contacted the loan officer from an online ad is which state the borrower is looking to purchase a home.
- In order for a loan officer to be able to originate and fund a borrower’s mortgage loan, the mortgage company that the loan officer represents needs to be licensed.
- Second, the branch office that the loan officer has their mortgage loan originator’s license needs to be licensed in the state the borrower is interested in getting a home loan in.
- Third, the assigned loan officer needs to be licensed.
- These licensing requirements apply to mortgage brokers and mortgage bankers but FDIC insured banks are exempt from state licensing requirements.
- What this means is if you are a loan officer who are employed by a FDIC Bank, you do not have to be licensed in any states and are exempt from taking and passing the NMLS Exam .
- The loan officer should take notes while interviewing the borrower.
Nicholas Ferrante Of The Gustan Cho Team at CrossCountry Explains Qualifying Borrowers
Here are the typical questions loan officers should ask borrowers when pre-qualifying borrowers during the initial interview:
- What is the price range on the home you are planning on purchasing? ( Important for DTI Calculations)
- What is the property taxes on the home that you have been looking? ( Important for DTI Calculations)
- Do you know approximately how much the homeowners insurance premium and if the property is located on a flood plain? ( Important for DTI Calculations)
- Borrowers: Who are the borrowers ( caller and spouse or just caller) . Are the borrowers hourly, salaried, or self employed? If hourly, ask how much an hour, overtime and/or bonus income and if so if they had a longevity of at least two years, if salaried employee ask how much they make as an annual salary and divide that by 12 to calculate monthly gross income, and if self employed, ask if they have been self employed for at least two years.
- Ask them if they have any other income. Social security income, pension income, and child support income can be counted. Part time income, overtime income, bonus income, and other income can be counted as long as they had a history of receiving such income for the past two years and the probability of continued income will look promising for the next three years. Those with irregular income and/or higher debt to income ratios, ask them if the need arises, if they can get non-occupant co-borrower to go on the loan with them.
- Ask them if they have car payment, student loans, any other monthly debts. Ask them if they have credit cards and what the limits are and the balances ( Used for debt to income ratio calculations and to see if there are any room for credit improvement. Paying down maxed out credit cards is a great way of boosting up credit scores)
- Ask them if they have any credit issues: 2 year waiting period after Chapter 7 Bankruptcy for FHA Loans and 4 year waiting period for Conventional Loans. 3 year waiting period after short sale, deed in lieu of foreclosure, foreclosure to qualify for FHA Loan. Four year waiting period after deed in lieu of foreclosure and short sale to qualify for Conventional Loan. Waiting period is 7 years after foreclosure to qualify for a Conventional Loan. The waiting period after deed in lieu of foreclosure and foreclosure starts from the recorded date and/or sheriff’s sale and not the days that the property was surrendered or the keys were turned in.
- Mortgage Part Of Bankruptcy On Conventional Loans : There are instances where borrowers can qualify for Conventional Loans but not FHA Loans due to the recorded date of their foreclosure on cases where their mortgage was included as part of their Chapter 7 Bankruptcy. If you had a mortgage or mortgages included as part of your Chapter 7 Bankruptcy, there is a four year waiting period from the discharged date of your Chapter 7 Bankruptcy discharged date and the recorded date and/or sheriff’s sale date of your foreclosure does not matter even though is much later after the discharged date of your BK. This does not apply with FHA Loans. With FHA, if you have a mortgage included in your Chapter 7 Bankruptcy, there is a three year waiting period from the recorded date of your foreclosure and/or sheriff’s sale date. This can be an issue when qualifying for a FHA Loan if the recorded date of the foreclosure prolonged many years after the Chapter 7 Bankruptcy discharged date.
- Ask about collection accounts, charge off accounts, judgments, tax liens, or delinquent child support and/or student loan accounts. Loan Officers need to understand that just because a borrower may meet HUD or Fannie/Freddie lending guidelines does not mean that they are fully qualified and a pre-approval can be issued. Loan officers need to check with their employer and make sure on the investor overlays their company has and get familiar with it before issuing the borrower a pre-approval letter.
- Loan officers also need to be aware that if a borrower went through credit repair and had public records such as bankruptcies, foreclosures, short sales, judgments, and tax liens removed off their credit reports that it will pass Automated Underwriting System, however, all loan borrowers will go through a third party public records check and all public records will be discovered.
Completing Mortgage Application And Credit Check
How Loan Officers Qualify Borrowers: The Pre-Approval Process: Once the loan officer deems that the borrower pre-qualifies for one of their loan programs, the loan officer can take the application over the phone or direct them to their company’s website and have the borrower complete the 1003, which is the official 4 page mortgage loan application. After reviewing the 1003, the loan officer will run a tri-merger credit report and will use the middle of the three credit scores. The loan officer needs to carefully review the borrowers credit report and look out for the following:
- Payment history for the past 12 months is a must on how loan officers qualify borrowers. The best way on how loan officers qualify borrowers is for them to thoroughly review the borrowers overall credit history besides just the borrowers credit scores. Look for late payments, credit disputes, collections, periodic late payments, and mistakes on the borrowers credit report.
- Credit Disputes: How Loan Officers Qualify Borrowers again depends on each individual loan officer but every loan officer needs to thoroughly review the borrower’s credit report for credit disputes. Borrowers cannot have any credit disputes on non-medical collection accounts if the aggregate total unpaid outstanding balance is greater than 1,000. Borrowers cannot have any credit disputes on charge off accounts. Borrowers can have credit disputes on medical collection accounts as well as non-medical collection accounts with zero outstanding balances.
- Income: Make sure that income has been properly qualified. If there are any questions on income, the loan officer should do a verification of employment prior to issuing a pre-approval.
- Loan officers need to take 5% of non-medical collection accounts that are greater than $2,000 and use that as monthly debt in the debt to income ratio calculations even though the borrower does not have to pay anything. If the 5% of the outstanding non-medical collection accounts is too much and will disqualify the borrower from qualifying for the mortgage, then the borrower can make a written agreement with the creditor and the amount agreed on the written payment agreement will be used to calculate the debt to income ratios.
- Loan officers need to check with their company and make sure there are no lender overlays on collections accounts and charge offs. Many mortgage companies will have overlays on collections and charge offs and many will request that collection accounts and charge offs be paid off even though HUD does not require it.
Automated Underwriting System
How Loan Officers Qualify Borrowers: Automated Underwriting System. How loan officers qualify borrowers depends on the individual loan officer. Again, I cannot stress enough the importance of the pre-approval stage of the mortgage loan process.
- The number one reason why there is major stress during the mortgage process and the single biggest reason for last minute loan denials is due to the borrower not being properly pre-qualified by their loan officer.
- Believe it or not, there are still loan officers that issue pre-approval letters to borrowers in 30 minutes or less without properly reviewing the necessary docs and reviewing the borrower’s credit report.
- Just because you have a higher credit score does not automatically qualifies a borrower. Special attention needs to be given to the borrower’s payment history, especially the past 12 months.
- Lates on a mortgage payment in the past 12 months can mean a denial from the Automated Underwriting System.
- It is always recommended that a loan officer run the borrower’s mortgage application through the Automated Underwriting System and get an approve/eligible per automated findings before issuing a pre-approval letter.
- For example, if a borrower had a 580 FICO credit score and qualifies for a 3.5% down payment FHA home purchase loan, the Automated Underwriting System can request verification of rent as part of the condition.
- If the borrower has been living with family and cannot provide 12 months canceled checks and/or bank statements showing their rental payments being deducted out of their bank account, then this borrower will not qualify for a FHA Loan because the verification of rent cannot be proved and for the AUS to be valid, all conditions on the AUS needs to be met.
- There are times where a borrower is very antsy and will threaten the loan officer if they do not give them a pre-approval that they will go with a different lender. If that is the case, it is best to let the borrower go to a different lender because of the consequences involved.
- Issuing a pre-approval before the loan officer is absolutely sure can create a lot problems because a borrower can enter into a purchase contract.
- Not only will the borrower not qualify for the mortgage, but it also affects the sellers, the realtors, the attorneys, and everyone involved in the mortgage process.
About The Author: Nicholas Ferrante Of The Gustan Cho Team at CrossCountry Mortgage
Nicholas Ferrante of The Gustan Cho Team at CrossCountry Mortgage is the consumer direct manager and in charge of The Gustan Cho Team Rapid Response Group at CrossCountry Mortgage. Michael Gracz and Nicholas Ferrante are the two top producing loan officers who are in charge of the expanding Rapid Response Group of The Gustan Cho Team at CrossCountry Mortgage. Both Nick Ferrante and Mike Gracz are available 7 days a week, evenings, weekends, and holidays to take on calls from borrowers who have gotten a last minute mortgage loan denial or are going through major stressful loan process due to not being properly qualified by their current loan officers. Nicholas Ferrante and Michael Gracz specialize in the following loan programs:
- FHA Loans with no overlays
- VA Loans with no overlays
- USDA Loans with no overlays
- Conventional Loans with no overlays
- Jumbo Mortgages
- Non-QM Mortgages
- FHA 203k Loans
- Reverse Mortgages
Please email us at email@example.com or call us at 262-878-1965 if you have any questions.