that Fannie Mae has let the Desktop Underwriter cat out of the
bag, what should borrowers know about it? For starters, the
system considers 14 factors when evaluating a mortgage. Some
are related to the parameters of the desired loan while others
pertain to the borrower. They are:
(the appraised value or sale value of the home minus the loan
Credit history (as measured by the FICO credit score)
Liquid reserves (the amount of liquid assets, such as cash left
in a checking account, after the loan closing divided by the
monthly mortgage payment)
Total debt-to-income ratio (the amount of monthly debt payments
for the expected mortgage, existing car loans, credit cards,
etc. divided by gross monthly income)
Borrower's work status (Is the borrower salaried or self-employed?)
Loan term (How many years will the loan be on the books?)
Rate and payment structure (Does it have an adjustable rate
or balloon payment?)
Number of units (Is the borrower buying a two-unit property
and renting out one of them, e.g.?)
Co-op, condo or attached (Is the borrower purchasing a condominium
or house, e.g.?)
Funds from other parties (Is much of the down payment coming
purpose (Is it for a home purchase or refinance? If it's a refinance,
is cash being taken out at closing? If so, how much?)
Number of borrowers (How many people are on the application?)
Prior bankruptcies or foreclosures
Prior mortgage delinquencies
The top three factors
Of these factors, Fannie Mae says that the three most important
are equity, credit history and liquid reserves. The system considers
a loan better if the borrower has more invested in the transaction
via a higher down payment. It also likes borrowers who have
managed finances well and have a fair amount of money left over
in the bank after closing because that provides a cushion against
of the remaining factors are self-explanatory. The system considers
someone who was 60 days late on a mortgage payment within the
past two years and a borrower who filed for bankruptcy in the
past as riskier.
are a little less clear. If a lot of down payment money comes
from someone else, for example, it's not necessarily bad. But
borrowers who put hardly any of their own money into the transaction,
or those who receive assistance in the form of a personal loan
from their parents rather than as a gift, might be considered
things such as loan term, the systems consider a 30-year fixed
rate mortgage less risky than an adjustable rate mortgage. That's
because borrowers default less frequently on stable, long-term
loans. At the same time, 15-year mortgages are considered less
risky than either because they default even less frequently
than 30-year ones.
history can be looked at in a couple of ways as well. A Freddie
Mac spokesman points out that Loan Prospector looks at consistency
of earnings, rather than just how they're made. So, a contractor
who has been in business for several years might score just
as well as someone who has worked for six companies in four
loan purpose, there's nothing better or worse about a straight
refinance loan. But if somebody is taking cash out at closing
such that the loan-to-value ratio rises too high, the system
might raise a red flag. The same goes for a borrower who buys
a multi-unit property with the intent of renting out part of
it. While there's nothing wrong with doing so, there might be
problems if the consumer couldn't make the mortgage payment
without the rental income.
last thing: Having a coborrower on the application can improve
the prospects for approval somewhat.
should remember these are just guidelines. The systems compare
application data in such a manner that strength in one area
can compensate for weakness in another, too. Don't assume that
you won't qualify just because you're getting a few thousand
dollars in down payment assistance from your parents.
Johnson, a Newport Beach, Calif. mortgage broker who wrote How
to Save Thousands of Dollars on Your Home Mortgage, remembers
one borrower who wanted to refinance her home loan about a year
ago. A Christian schoolteacher, she didn't make much money and
was stuck with a total debt to income ratio of around 55 percent.
But the loan was for only about $105,000 on a $400,000 home.
Along with that low loan-to-value ratio, she had money in the
bank and a stellar bill-paying history. As a result, the automated
underwriting system approved the loan.
So once the systems run their computations, what happens next?
Both agencies respond to applications in one of three ways;
the following three answers come from Desktop Underwriter:
-- The agency will most likely buy the loan because it shows
little risk of default.
Refer -- The loan needs to be reviewed by a human underwriter
to clear up data questions, but it may very well be purchasable.
Refer With Caution -- The mortgage doesn't look like it will
pass the test, so a human underwriter has to review it.
Even if you think you're all set, there are instances where
Fannie Mae's system will give a loan a refer rating no matter
what. This happens when:
borrower's debt to income ratio is "unusually high?"
The agencies won't clarify what that means, but they do say
the ratio would have to be much higher than the 36 percent to
38 percent level that some lenders consider risky.
The borrower has less cash in the bank than is needed to close.
If Joe has $8,000 to buy a house and he pays $4,000 in closing
costs and $4,000 as a down payment, everything's peachy. But
if closing costs were $5,000, the system would refer the loan.
A bankruptcy or foreclosure appears on the credit report with
no date known.
The borrower declares either of those problems but the credit
report doesn't have a record of it.
Armed with this information, consumers can go into their lenders'
offices knowing what might trip them up.
self-employed borrower who is getting down payment money from
the parents to buy a duplex with an adjustable-rate mortgage
may want to consider a longer-term rate lock, for example, because
closing will likely take a while. Somebody with hardly any cash
reserves may want to consider saving more money, too, rather
than waste time and money applying for a loan they may not get.
At the very least, lenders say, consumers should familiarize
themselves with what they're being graded on before they take