Changing Underwriting Rules: Will You Still Qualify?

The current mortgage landscape is suffering from a series of aftershocks following the mortgage industry’s 2007 major quake. It used to be easy to find the right ingredients for cooking up a solution to whatever financing challenge arose. But that was yesterday. And this ain’t your mama’s kitchen anymore.

Today’s rules are tomorrow’s moldy muffins. And the burning question from one week to the next is: will your approval still be good when you go into Contract?

The Problem with “Overlays”

Aside from constantly changing rules, banks apply their own “overlays” on top of normal lending guidelines. Take this example. FHA rules have this to say about credit:

“Neither the lack of credit nor the borrower’s decision not to use credit may be used as a basis for rejecting the loan application. We also recognize that some prospective borrowers may not have an established credit history. For those borrowers, and for those who do not use traditional credit, the lender must develop a credit history from utility payment records, rental payments, automobile insurance payments, or other means…”

Okay, seems reasonable. Some people don’t use credit or they’re young and haven’t acquired much credit. So we build alternative credit. But, here is today’s Chase email:

“Effective June 27, 2008, Chase will no longer accept nontraditional or alternative credit histories for FHA loans. ”

So, alternative credit is fine with FHA but not if your applying for an FHA loan through Chase. You see the problem? And who’s next? Often these notifications are a shot across the bow that other lenders will soon follow suit.

Automated Underwriting, the Non-Standard Standard

Fannie Mae and Freddie Mac both have their proprietary Automated Underwriting Systems (AUS). Fannie Mae’s is called Desktop Underwriter (DU), Freddie Mac’s is Loan Prospector (LP). Each is slightly different and prioritizes risk a little differently. It used to be true that once you had a DU or LP approval, you could take that to any bank and they would accept it as is, confident that they could unload those loans in the secondary market.

These days however, banks have their own AUS engines that overlay more restrictive rules, rendering a direct DU or LP approval questionable if not entirely worthless. It all makes for shaky ground, where an approval this week may not stand next week. And as buyers in Sacramento compete once again for lower priced properties, often taking months to secure a home, the question remains: Will today’s approval still be good tomoorrow ?