This Article Is About The Five C’s Of Mortgage Underwriting Leading To Clear To Close
With mortgage loans, the risk analysis is critically important, so it is a good idea to review the file in detail before even submitting it. It is the responsibility of the mortgage underwriter to analyze the layered risk of the lender and the borrower’s ability to repay. Just because the borrower meets the agency lending guidelines does not mean the borrower has the ability to repay their new mortgage. Underwriters need to review and take a look at the overall picture of each borrower before issuing a conditional loan approval and eventually a clear to close.
The mortgage underwriter will look at the following:
- adverse trade lines
- high loans-to-values
- high ratios
- heavy credit uses
- payment history in the past 24 months
- history of late payments and reasons why borrower had trouble paying monthly obligations on time
- lack of savings
- employment history, increases in income, and the likelihood of consistent employment
- compensating factors
The riskier the loan, the more compensating factors should be presented with the file. The loan officer should prescreen the loan for risk and compensating factors. Loan Officers should always be looking for the big picture. They should weigh all factors the way the underwriter will.
Processing And Underwriting The Five C’s Of Mortgage Underwriting Leading To Clear To Close
Remember The Five C’s Of Mortgage Underwriting Leading To Clear To Close when putting together a loan package:
Look at The Five C’s Of Mortgage Underwriting Leading To Clear To Close:
If the loan officer feels that there are multiple layers of risk, then he or she should look for acceptable compensating factors to offset them. HUD, the parent of FHA has a published list of compensating factors that may be used as a guide.
Credit Of The Five C’s Of Mortgage Underwriting
FHA requires borrowers to have a minimum of 580 credit scores to qualify for a 3.5% down payment home purchase loan. Any FHA mortgage loan applicant with a credit score of 620 and under are considered a higher-risk borrower.
Underwriters will analyze the following:
- The front end debt to income ratio is the principal, interest, taxes, and insurance or PITI divided by the borrower’s monthly gross income
- The maximum debt to income ratio is capped at 43% for borrowers with credit under 620 normally to get an approve/eligible per Automated Underwriting System Approval
Borrowers with credit scores of 620 or higher, the front end debt DTI are capped at 46.9% and the back end DTI are capped at 56.9% to get an approve/eligible per AUS.
Outstanding Collection Accounts And Charge Off Accounts
HUD, the parent of FHA does not require borrowers to pay outstanding old collection accounts with balances or charged-off accounts. Other government and conventional loan programs do not require outstanding collections and charged-off accounts to be paid to qualify for owner-occupant home loans. However, HUD has the most lenient guidelines when it comes to derogatory credit. However, The Five C’s Of Mortgage Underwriting mandates that mortgage underwriters evaluate prior derogatory tradelines.
Mortgage agencies HUD, VA, USDA, Fannie Mae, Freddie categorizes collections into two categories:
- Medical collections
- Non-medical collections
Medical Versus Non-Medical Collection Accounts
Medical collections are often ignored by lenders unless the mortgage lender has its own investor overlays. Investor overlays are extra lending guidelines on top of the minimum agency guidelines.
For example, here is a case scenario:
- A home buyer will qualify for an FHA loan with $10,000 of unpaid medical collections under HUD lending guidelines
- However, the lender may require that the medical collections be paid off in order for a loan applicant to qualify with their company
- Even though the borrower meets the minimum HUD agency guidelines to qualify for an FHA loan, the borrower cannot qualify with this particular lender because this lender has lender overlays on collections.
- Lender overlays are lending requirements that are above and beyond the minimum agency mortgage guidelines of FHA, VA, USDA, Fannie Mae, Freddie Mac.
If denied a mortgage loan due to outstanding collections and charged-off accounts, please contact us at Gustan Cho Associates Mortgage Group at 800-900-8569 or text us for a faster response. Or email us at firstname.lastname@example.org. Gustan Cho Associates will just go off automated findings per DU FINDINGS or LP FINDINGS via Automated Underwriting System.
Non-Medical Collection Accounts
With non-medical collections, 5% of the unpaid balance is calculated when the underwriter is calculating the borrower’s debt to income ratios.
- Again, HUD does not require outstanding collection accounts to be paid
- However, the particular lender may have overlays
- They may require borrowers to pay off the old collection account balance
- With non-medical outstanding collections with greater than $2,000 balance, HUD requires underwriters to take 5% of the outstanding balance and use it as hypothetical monthly debt in DTI Calculations
- If the collection account has a large balance, borrowers can make a written payment agreement with the creditor
- The minimum monthly payment agreement will be used towards mortgage qualification in determining debt to income ratios in lieu of the 5% of outstanding balance rule
Waiting Period After Housing Event
All agency loan programs have a mandatory waiting period to qualify after bankruptcy, foreclosure, deed in lieu of foreclosure, and short sale.
There is a two-year waiting period after bankruptcy discharge date to qualify for FHA, VA, USDA Loans. There is a three-year waiting period to qualify for FHA and USDA loans after housing event.
Housing event is the following events:
- deed in lieu of foreclosure
- short sale
VA requires a two-year waiting period after a housing event. The waiting period after Chapter 7 Bankruptcy discharged date is two years to qualify for VA Home Loans. Waiting period start date is from the recorded date of the foreclosure which is reflected in the county recorder of deeds office or the date of the sheriff’s sale. There is a three-year waiting period to qualify for an FHA and USDA loan after a short sale reflected on the HUD settlement statement of the short sale
Borrowers can have prior bad credit, housing events, bankruptcy in the past, and qualify for a mortgage. However, re-established credit and no late payments after a period of bad credit is key to The 5’c Of Mortgage Underwriting.