How Loan Officers Qualify Borrowers And Issue Pre-Approvals

How Loan Officers Qualify Borrowers And Issue Pre-Approvals

Gustan Cho Associates are mortgage brokers licensed in 48 states

This Article Is About How Loan Officers Qualify Borrowers And Issue Pre-Approvals 

How Loan Officers Qualify Borrowers is one of the most important factors in the mortgage process.  The Pre-Approval Process is the most important stage of the mortgage process. The number one reason why borrowers get a last-minute loan denial by the underwriter is that the loan officer did not properly qualify borrowers The mortgage business is quite complex. It takes time for a loan officer to become an expert with the various mortgage guidelines and case scenarios that are presented to loan officers

How Loan Officers Qualify Borrowers And Issue Pre-Approvals: Understanding And Getting Familiar With Case Scenarios

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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 has its own lender overlay. 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 lenders. For example, HUD, the parent of FHA, requires borrowers to have a 580 FICO credit score to qualify for a 3.5% down payment home purchase loan. A lender does not have to lend with a borrower who applies with them with a 580 FICO credit score. Mortgage companies can have lending requirements that are above and beyond the minimum agency guidelines.

Agency Mortgage Guidelines Versus Lender Overlays

Most lenders do have overlays on credit scores. They will require a higher credit score than the minimum 580 FICO credit score required by HUD. Most banks will require a 640 FICO credit score. 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 Gustan Cho Associates. HUD allows borrowers with under 580 FICO credit scores to qualify for FHA Loans. However, a 10% down payment is required.

Gustan Cho Associates will approve borrowers with credit scores down to 500 credit scores with an approve/eligible per automated underwriting system. Besides the 10% down payment, compensating factors are expected with borrowers with low credit scores. Gustan Cho Associates does not have any lender overlays on government and conventional loans.

How Loan Officers Qualify Borrowers And Issue Pre-Approvals: Initial Interview Between Loan Officer And Borrowers

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
  • The first important question the loan officer asks the borrower, especially if the borrower contacted the loan officer from an online ad in 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 is employed by an FDIC Bank, you do not have to be licensed in many states and are exempt from taking and passing the NMLS Exam

The loan officer should take notes while interviewing the borrower.

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Here are the typical questions loan officers should ask borrowers when pre-qualifying borrowers during the initial interview:

  • What is the price range of the home you are planning on purchasing? ( Important for DTI Calculations)
  • What is the property taxes on the home that you have been looking for? ( Important for DTI Calculations)
  • Do you know approximately how much the homeowners’ insurance premium is 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
  • if so if they had the longevity of at least two years
  • if salaried employees ask how much they make as an annual salary and divide that by 12 to calculate monthly gross income

If self-employed, ask if they have been self-employed for at least two years.

Key Questions Loan Officers Should Ask Borrowers

Loan officers should take time in interviewing borrowers. Most borrowers may not know what information to volunteer. Therefore, it is key to ask borrowers important questions that may affect their qualifications. The following questions should be asked:

  • Social security income
  • pension income
  • child support income can be counted
  • Part-time income
  • overtime income
  • bonus income
  • 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 a non-occupant co-borrower to go on the loan with them.

Liabilities And Credit Of Borrowers In Determining Debt To Income RatiosGustan Cho Associates

Ask them if they have a car payment, student loans, any other monthly debts. Ask them if they have credit cards. What the limits are and the balances (Used for debt to income ratio calculations and to see if there is any room for credit improvement). Paying down maxed-out credit cards is a great way of boosting up credit scores).

Waiting Period Agency Guidelines On Government And Conventional Loans

Loan officers need to make sure if the borrowers had a prior bankruptcy and/or a housing event. There are instances where bankruptcy, foreclosures, deed in lieu of foreclosures, short sale, judgments, tax liens do not report on consumer credit reports. The waiting period start date of a foreclosure and/or deed in lieu of foreclosure does not begin until the actual recorded date of the foreclosure and/or deed in lieu of foreclosure and NOT the date the home was forfeited to the lender:

  • Borrowers must meet a 2-year waiting period after Chapter 7 Bankruptcy for FHA and VA Loans
  • Mortgage borrowers must meet a three year waiting period after the recorded date of foreclosure, deed in lieu of foreclosure, short sale on FHA and USDA Loans
  • There is a two year waiting period after foreclosure, deed in lieu of foreclosure, a short sale on VA loans
  • Borrowers must meet a 4-year waiting period after Chapter 7 Bankruptcy for conventional loans
  • There is a four year waiting period after the Chapter 13 Bankruptcy dismissal date to qualify for conventional loans
  • Mandatory waiting period after the Chapter 13 Bankruptcy discharged date to qualify for conventional loans
  • There is a four-year waiting period after a deed in lieu of foreclosure and short sale to qualify for Conventional Loan
  • The waiting period is 7 years after a foreclosure to qualify for a conventional loan
  • Borrowers must meet a waiting period after a 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

Gustan Cho Associates offers non-QM mortgages one day out of bankruptcy and foreclosure with 30% down.

Mortgage Included In Bankruptcy Lending Guidelines

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 the following guidelines applies:

  • there is a four year waiting period from the discharged date of Chapter 7 Bankruptcy discharged date
  • the recorded date and/or sheriff’s sale date of your foreclosure does not matter
  • this holds true even though is much later after the discharged date of your BK
  • This does not apply with FHAlLoans

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 an FHA Loan if the recorded date of the foreclosure is prolonged many years after the Chapter 7 Bankruptcy discharged date.

Questions To Ask Borrowers About Credit And Public Records

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 the following:

  • bankruptcies
  • foreclosures
  • short sales
  • judgments
  • tax liens removed off their credit reports that it will pass Automated Underwriting System

However, all 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 1003, which is the official 4-page mortgage loan application
  • After reviewing 1003, the loan officer will run a tri-merge 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 how loan officers qualify borrowers is for them to thoroughly review the borrower’s overall credit history besides just the borrowers’ credit scores
  • Look for late payments, credit disputes, collections, periodic late payments, and mistakes on the borrower’s 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.

Qualified Income And Debt To Income Ratios

The Importance Of Income In The Qualification And Pre-Approval Process:

  • 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
  • This holds true 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
  • 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

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. They issue pre-approvals without properly reviewing the necessary docs and reviewing the borrower’s credit report. Just because you have a higher credit score does not automatically qualify a borrower. Special attention needs to be given to the borrower’s payment history, especially the past 12 months. Late payments on a mortgage in the past 12 months can mean 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.

Importance Of Automated Underwriting System Approval Prior To Issuing A Pre-Approval Letter

Make sure to 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 an FHA Loan
  • This is 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
  • They 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
  • This is because of the consequences involved
  • Issuing a pre-approval before the loan officer is absolutely sure can create a lot of 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 Of How Loan Officers Qualify Borrowers

Alex Carlucci is the author of this blog on How Loan Officers Qualify Borrowers. Alex Carlucci is an associate contributing editor and a senior loan officer at Gustan Cho Associates. Alex is in charge of The Gustan Cho Team Rapid Response Group at Gustan Cho Associates. Michelle McCue and Alex Carlucci are the two top producing loan officers who are in charge of the expanding Rapid Response Group at Gustan Cho Associates..

Both Alex Carlucci and Michelle McCue are available 7 days a week, evenings, weekends, and holidays to take on calls from borrowers. Over 75% of our borrowers are folks who have gotten a last-minute mortgage loan denial. Or are going through a major stressful loan process due to not being properly qualified by their current loan officers.

How Loan Officers Qualify Borrowers: Importance Of Fully Qualifying Borrowers Prior To Issuing Pre-Approvals

Alex Carlucci and Tammy Trainor 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 gcho@gustancho.com or call or text us for a faster response at 800-900-8569 if you have any questions. 

This BLOG On How Loan Officers Qualify Borrowers Was UPDATED On August 25th, 2021.

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