Friday, February 2, 2018

Undermining the Underwriting is Never a Good Idea

Most real estate sales transactions will involve a lender. Mortgage loans are very complicated and involve a number of individuals in the process. The loan is the longest process in nearly every transaction.

It is important that all parties, including their agents understand the basic process and principles in a mortgage loan. First, there are two primary groups involved in a mortgage loan. Origination and Underwriting. This is a bit of oversimplification on purpose. Origination is the interface with the public and ultimately the individual borrower. Origination includes a loan officer or broker, loan processing staff, and marketing personnel. This can be a large group of people or even just one person. Underwriting is generally done elsewhere and is the entity that protects the interests of the lending institution and the future investors that will ultimately carry the paper to term.

Origination is the capitalist portion of the deal. They want to originate as many loans as possible and often the origination team is working on at least a partial commission basis. Origination spends time, money, and effort to acquire new clients. They retain those clients for future business and referrals by providing a quality and professional level of service to the borrowers. They collect all of the required documentation and guide the borrower through the process. They start by offering counsel on the various types of loan products available to the borrower so the borrower can make the best decision possible. This is where the proverbial rubber meets the road. Not all loan officers and origination teams are created equal. 

A good originator understands the delicate interaction between underwriting and origination. There is a bit of an opposition in the two groups. Originators want to help their client achieve their goal and underwriters are there to protect the bank from a bad deal. So the originator is trying to push his clients loan through to the finish and the underwriter is stopping the process at every way point investigating and sniffing around to ensure everyone is playing within the rules.

Underwriters by nature have to be a bit cynical and pessimistic about every deal. They are the gatekeepers. They are the last line of defense against fraud, abuse, and bad loans. They will absolutely freak out when something odd enters into the equation. They tend to assume guilt until innocence is proven. This is a not intended to a bash on underwriters, but rather to help buyers understand why underwriters seem to be questioning their every document and digging deep into their financials. Make no mistake, the bank is about to loan a large sum of money to an individual whose annual income may only be 1/15th of the loan amount.

Buyers need to follow the instructions of the loan officer to the letter. Buyers need to avoid any significant financial maneuvering during the process. This means do not transfer thousands of dollars into or out of the bank account from which the down payment is coming. Do not go out and buy a new car, or appliances and such. All of this activity will either be suspicious to the underwriter or it may simply change the qualifications of the buyer. It can delay and or kill your deal.

Realtors should avoid last minute addendums to the contract if possible. Underwriters will stop the works and investigate the change leading to delays and possible deal crashing results. Clients that are under the advisement of an attorney should also make sure they keep the Realtors informed of any planned changes to status implemented by the attorney. Few things freak out an underwriter more than the presence of an attorney in their deal.

This is mostly common sense stuff, yet I see all too often real estate transactions suffering a bunch of unnecessary drama at the finish line; it is often due to one person or group puffing up their chest and not keeping all participants in the "loop". Although we cannot "control" our clients, we professionals can control our own conduct and that should always involve open communication and cooperation to result in a happy end for all parties to the transaction.

Buyers and sellers need to follow the advice of all the professionals working on their deal and if a conflict arises in that advice from say the loan officer to the realtor, get the two on the same page before acting. Underwriters may be warm and genuine soft souls outside of work, but inside the office they are calculating and condemning. They don't like surprise parties, and they don't like cloudy gray areas. Most importantly, buyers should carefully choose their Realtor and their loan officer and vet them on character, quality of work, and experience. Lowest price or rate is not always the best deal.

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