Loan Process

[Jon New]

I was hoping someone out here would be able to provide some insight on just exactly how the process of getting a loan approved and underwritten works. Seems as though the standards aren't always the same. Any insight would be appreciated!

Thanks

[Dion DePaoli]

I will be happy to swing at the ball for you on your initial question:

1. Initial application is filled out via some form of interview between loan officer or loan broker and potential borrower. Usually this is an over the phone or distant interview. Only the data needed to fill in a 1003 (Uniform Residential Loan Application) is collected.

2. Loan officer submits the 1003 through to one of the agencies or to a suitable investor. For Fannie Mae the digital engine is called "DU" (Desktop Underwriter) and for Freddie Mac the engine is called "LP" (Loan Prospector) and they both also use "DO" (Desktop Originator). The digital engine is just that a digital underwriting engine which reads the data on a 1003 and then determines weather the loan eligible to be sold into Fannie/Freddie.

Other investors such as HUD or VA or USDA usually have manual approvals where the 1003 is reviewed by a real person for eligibility.

When the data is loaded into the system, the system spits out an eligible level the most commonly know are DU responses which are Approved Eligible (EA), and EA 1 and EA 2, where the 1 and 2 are diminishing levels of qualifying.

It is also important to note, the loan officer, when uploading your 1003 picks the loan program initially or loan product. The system does not pick your program only determines if you qualify for the program.

3. So once the 1003 is loaded in, and the response comes out, that is a "Conditional Commitment" or sometimes refereed to as a "Stip List". Meaning, the loan is approved subject to the following criteria being proven true in formal underwriting. This generates the list of needed documents in order to prove the information that has been put on the 1003 which can include income, asset and liability information for the borrower. This is also subject to the loan product or loan program, for instance, a no income verification loan requires no verification of the income stated on the 1003 so no W-2 or tax forms are needed to be collected for that purpose. The opposite is true as well, the system reads the credit profile and 1003 of the borrower and creates a standard set of stipulations that the loan office must collect and submit into underwriting in order to have the loan formally approved.

4. The next step is usually the initial loan packet signing by the borrower and initial document collection. The packet includes the 1003 as well as other disclosures and a mortgage broker contract for their fee if a broker is present.

5. The loan officer then takes the packet in and sometimes those loan officers use a "Processor", which is a person who processes the paperwork. They arrange the paperwork according to the lender's wish and then send them to underwriting. A processor is not an underwriter and does not approve or deny your loan.

Usually, this is where all the third party services are ordered such as appraisal and title commitments and closing protection letters.

Somewhere around this step the borrower will usually see document packets arrive in the mail that do not need to be executed and returned. This serves two functions. As the origination team "stacks" the file (arranges the paperwork), they also verify the interview information, such as wages. If during the interview the applicant said they make $50k per year, the origination team verifies that number against the collected paystub and tax forms and corrects the number to be mathematically correct to the supporting documents. The new packet serves as new and proper disclosure to the borrower. Depending on the lender or broker there may be more than one packet received from the two different entities. One from the broker and one from the actual lender funding the loan.

6. When the loan information is sent it to underwriting, an underwriter will review the information sent and will update the conditional commitment or stip sheet. As items are cleared, they are removed as a condition to get the loan. This is why you hear loan officers or loan people refer to clearing stips.

This is usually the most involved portion of the loan for the borrower and the origination team. Good loan officers and processors know what documents to collect and what those documents need to say or have an understanding of how to document things out. Some do not. And sometimes, the origination team must simply wait for the underwriter to determine if a document can be used to support the loan. All of that creates multiple requests to the borrower for documentation.

This is also where loans are denied. The denial stems from the gap in the interview information versus what the documents prove. A borrower can say they make $100k a year but if they can not prove it, they may not qualify for the that loan program any longer and are denied from the program they were initially intended to get.

If a denial takes place, usually there is a backup program that the borrower can be put into. This is also why borrower's see rate changes. More so with non-agency loans with manual underwriting since you have to see if the underwriter will accept the loan. So, if the borrower who said they make $100k is submitted as a full document loan but once the documents are collected and submitted the wage documents do not support the loan amount or are rejected for other reasons, the borrower would then have to be put into a no income verification or no income documentation loan. As the borrower's documentation gets further away from full documentation, the risk the investor is higher, which demands higher interest rates and other parameters such as down payment.

7. Once all of the stipulations have been cleared, the loan is designated "Clear to Close". In some lenders this is a separate department which coordinates the funding of the loan with the title company or title attorney. The lender will send a loan package and have the title agent prepare primarily closing statements and any other relevant documents.

8. The the borrower shows up and executes the paperwork and the loan funds. Unless it is a refinance which has a 3 day right of rescission before funding.

Other concepts which are usually misunderstood by many. Fannie Mae and Freddie Mac do not "make" loans. Fannie/Freddie are loan investors. The loan is made by a lender (bank or non-bank) which has approval to sell loans into Fannie/Freddie. This creates some of the layman confusion when it comes to underwriting criteria for the agencies.

Fannie/Freddie have underwriting guidelines which are the minimal standards which a loan must have in order to be purchased by the GSE's. However, the relationship between Lender to Fannie/Freddie has representations and warrants which are made and deal with buyback clauses where a lender may send a loan to Fannie/Freddie but upon their review they can reject the loan and the lender must buy the loan back. This creates a problem for the lender as most lenders use what is referred to as a Warehouse Line of Credit to fund their loans. This is a short term credit facility usually not longer than 6 to 10 months. So when a buyback is issued or a loan is simply rejected from delivery, the loan sits on the warehouse line diminishing the lending capital of the lender and carries penalties from the investor who granted the credit.

As a result of this function, lenders create what are called "Overlays". An overlay is where the lender adopts the Fannie/Freddie standard but increases the standard of the criteria. An easy example is credit scores, Fannie/Freddie loans are eligible with borrower FICO as low as 620 but many lenders will not write a loan with less than a 640 score. This gives the lender some protection from kick-outs from the GSE's. Continuing the credit example, a borrower with a 625 gets a loan and the next day buys a car. When the loan is pooled and sent into Fannie/Freddie they will re-pull the credit for verification, due to the car loan the borrower's credit score drops to 615 and now the loan is ineligible to be sold to the GSE's. Thus they create the overlay which helps buffer the kick out loans. The overlays is why it seems that many banks have their "own" guidelines but still make Fannie/Freddie loans.

Other interesting concepts, the underwriter who underwrites the loan for the GSE's is a certified and designated underwriter for GSE loans. They are usually found in the lender's operation who has a contract to sell into Fannie/Freddie and are not actual Fannie/Freddie employees.

Lenders have to get approved in order to sell into the GSE's. This includes some form of volume commitment. Because of this not all lenders are approved sellers. Many approved sellers function as the gateway, if you will, into Fannie/Freddie. This also is where most of the initial pools of loans are created. Normally, you do not sell into Fannie/Freddie in a one-off status but rather in a pool. So the large banks such as Wells, BOA and Citi are all approved sellers. Those firms also serve as a gateway for smaller banks and lenders to originate loans that eventually make their way into Fannie/Freddie.

Well some of that might be a bit of a ramble but the information is there. Feel free to ask more specific questions as needed and I am happy to try and address.