A new study suggests that one of the reasons many subprime loans have failed is because of very weak underwriting.
“Underwriting” is the process by which a lender decides if a borrower is a good risk. It involves looking carefully at the paperwork provided by the borrower, including a signed loan application, bank account statements, paycheck stubs, tax returns, and profit and loss statements (if the borrower is self-employed) and a review of the appraisal of the property obtained by the bank.
The underwriting process also includes a process called “verifications.” The loan officer is supposed to call your bank and verify how much cash you have in your account. He or she is also supposed to call your employer to verify your employment history and income information. If the facts you’ve put down in your application can’t be verified, the loan officer is supposed to reject your loan application.
This isn’t what happened in the subprime market meltdown. In some cases during the past several years, if a borrower’s information couldn’t be verified, the loan became a “stated income” or “no doc” loan. The borrower simply paid a higher interest rate and fees and limited or no verifications were performed.
As a borrower, you want the lender to be sure you’re qualified to borrow the amount you have in mind. You want to know exactly how much you’ll owe each month, and for how long.
Underwriting the loan is arguably the most important thing a mortgage lender can do, and we’ve all seen the results of poor underwriting – a high rate of foreclosures and defaults.
When choosing a good mortgage lender, whether you choose a mortgage broker or a mortgage banker, you’ll want someone who can do the job right. Finding a lender who will take the time to make sure you understand the different loan programs being offered, and will help you decide which loan best meets your needs is key to having a smooth closing.
How do you find a good lender? As with finding a good real estate agent, start by garnering recommendations from your friends, family and work colleagues. If you are working with a real estate attorney, he or she should have the names of loan officers who do a good job for their clients. Your real estate agent, if he or she is a pro, will have a list of names of mortgage lenders the company does business with.
Beware of real estate agents who only proffer the name of only one mortgage broker or lender, particularly if that lender is an in-house mortgage broker. The in-house lender may not be a bad lender, but you need to make sure you find the best lender for your circumstances and lending needs and not the lender that may yield the greatest benefit to the real estate agent’s company.
You should also include a credit union, if you belong to one or can join one. Credit unions typically offer some of the least expensive loan programs, whether you’re looking for a mortgage or a car loan.
Once you compile your list, you should do some basic due diligence to make sure that the loan officer and mortgage company is in good standing in your state, and that there are no outstanding complaints against them through the Better Business Bureau (BBBonline.org).
Next, start calling the loan officers to chat about their offices, how long they’ve been in the business, how many mortgages they’re currently working on and your own situation.
(By now you should have in hand a current copy of your credit history and credit score, which you can buy for $14.95 at MyFico.com or even less if you obtain a free copy of your credit history through www.annualcreditreport.com. Ask the loan officer to assume that you have this particular credit score for the purposes of your initial consultation, so your credit history isn’t tapped unnecessarily.)
You can ask each lender to give you a best price offer for the loan program in which you’re interested. So, if you want a quote on a 30-year fixed-rate loan and you’re putting down 10 percent, ask for that price quote. If you haven’t quite decided between a 30-year fixed-rate mortgage and a 5/1 adjustable rate mortgage (ARM), then ask for both. Be sure to ask for a detailed list of fees that will be charged for the loan.
These “other” fees can differ greatly between lenders. While some fees may be the same from one lender to the other, some lenders add additional fees to their services. Whereas one lender may have $800 of additional fees going to the lender another may have fees that may be double that for the same loan and the same interest rate.
At the end of the conversation, you should feel comfortable with the loan officer, and the loan program he or she has offered. If you get a funny feeling that maybe something isn’t quite right, (perhaps the loan officer is too eager to get your business?), then it’s time to do some more research.
What about online lenders? Mortgage companies have collectively spent hundreds of millions of dollars creating fancy websites designed to attract borrowers. There’s nothing wrong with doing some research online and perhaps even applying for a loan online.
But you’d want to know that the company you’re doing business with is real.
If you’re choosing a lender like Bank of America, Citi, Sun Trust, or Countrywide, you won’t necessarily get a cheaper price by applying online. But it will take away some of the opportunity to have a personal experience, which I think is important in this, the single biggest purchase of your life.