Basic Loan Processing Standards   CONTENTS: What is Processing? Full Documentation/Alt Doc/No Doc Automated Underwriting

Processing of your loan is simply Verifying the information you supplied on your loan application. Then assembling & presenting this information to the Underwriter in the best possible way. Presentation is probably the most important aspect of processing.

Basically a mortgage company has to verify (with no gaps):

2 years address history (which might be on your credit report)

2 year job & income history

Money presently in deposit institutions as well as the average balances (to show how long the money has been in the account & that it is your money not a gift, borrowed or drug money)

Acceptable Credit history

 

Stated that way it doesn't sound too hard or complicated does it?

Once your information is "processed" it will be looked at in 2 distinctly different ways.

It is first necessary for your information to be presented in such a manner that makes your situation easily understandable by the Underwriter and in a positive enough manner that she wants to approve you.

Then your file will be scrutinized to see if it was processed and documented to both Federal and Secondary Market standards.

To meet Federal standards your information may be gathered only in certain ways. Basically it boils down to the need for a paper trail that would hold up in a court of law in case someone "fudged" the figures. Loan approval conditions usually arise due to the need to meet Federal and Secondary Market standards.

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Traditionally there have been 3 levels or types of loan processing:
FULL, ALTERNATE & NO DOCUMENTATION

 

FULL DOCUMENTATION is the traditional way of verifying all your information by paper. Verifications need to be mailed to your present and ex-employers, landlords, and deposit institutions. This type of processing takes the longest, but gives the underwriters the greatest level of comfort.

 

ALTERNATE DOCUMENTATION is really a Full Doc loan, but instead of contacting your employer, bank, landlord, etc. for documentation the underwriter will accept documentation already in YOUR possession. For instance you may furnish the lender with 2 months worth of pay stubs or the last 3 months bank statements to verify your income and bank balances. You can't do this in every situation but it does save time where applicable.

 

NO DOCUMENTATION is just what it sounds like, the underwriter simply accepts your word on some of the information furnished and does not ask for further documentation. There are No Income loans (NIV), No Asset loans (NAV) and No Income & No Asset loans (NINA). Obviously these are the riskiest type of loan so they usually carry rates higher than a Full Doc loan. There is an old lenders saying "The higher the risk, the higher the rate" which means the NINA is the most expensive of the 3.

 

Basically the more information you allow the mortgage company to verify the more comfortable the underwriter will be with you and the lower your interest rate can be. The traditional rates you usually see quoted are for a FULL Documentation loan.

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RECENTLY A NEW TYPE OF PROCESSING HAS BEEN ADDED.

Automated Underwriting (AUL) or computerized underwriting has been added to the traditional human underwriting. Fannie Mae and Freddie Mac say they can match a prospective borrower's profile against hundreds of thousands of Buyers with a known performance level (existing loans) and get a more accurate idea of how YOU will pay than under traditional methods.

Does it work like they are predicting? Only time will tell, but in the interim the computer has usually been asking for less information to be documented than is traditional in a Full Doc loan. Sometimes AUL loans come back asking for only very limited or no documentation and yet the Buyer gets the benefit of the lower Full Doc rates.

Let me give you an example of how AUL compares to traditional underwriting. In the past a self employed or commissioned person has traditionally had to prove up a 2 year income history per tax returns. With AUL there is the potential to be asked to furnish only a recent computer generated paystub, the most current bank statement and a credit report. In this situation your loan could be processed in only a day or so. Great credit scores, stability and a large amount of assets are THE big keys to a good AUL recommendation so they are not for everyone.

Another plus to AUL is that if Fannie & Freddie have done enough loans in a given neighborhood, AUL might not ask for a full appraisal because they know property values are stable or increasing. In this case they might only ask for a drive-by appraisal which can save time and money. The downside is that a drive-by appraisal is not as accurate as the traditional appraisal in which the Appraiser enters the property and tries to determine actual market value. Sellers tend to love the drive-by but Buyers prefer the certainty factor of a full appraisal. A Buyer can always demand, and pay for, a full appraisal.

Some Mortgage companies are calling AUL a PreApproval, BUT IT IS NOT!

An AUL finding is only a recommendation that IF everything checks out EXACTLY as the the information was entered into the computer. IF nothing such as income or loan balances has changed in status (even the bank balances cannot vary AT ALL) then the computer recommends an underwriter look on your application favorably. A human underwriter still has to look at your documentation and be sure everything matches and there are no additional questions raised by your documentation. For instance is that Credit Union withdrawal on your pay stub a savings deposit or is it a payment on an undisclosed debt?

 

What is Best for You?

No one can know without having a lot of detailed information about your situation. Every situation is different so give one of our Lending Partners a call and they will gather the data and present you with your options.