The Cast of Characters - Part II
If you think it sounds a little too close to "The Undertaker" you're absolutely right! This is the person that could make or break your real estate transaction. The funny (but awful) thing about this is that the underwriter absolutely has the most power over the decision of your loan, yet you will never meet or even speak to this person.
After your buddy, the Loan Officer, has put together the loan file in a neat and easy-to-understand package, the underwriter will begin to tear it apart limb from limb. She will disect the loan into each of its 4 factors: income, assets, credit, and property type (we'll dive into more detail about these on a later post. Knowing these four loan factors can give you the control in the decision of your loan!)
The underwriter is someone paid by the lender to minimize thier risk in a transaction and uncover any potential fraud. This is how they do it:
Let's say you said that you make $100,000 per year at your job. The loan officer asked this question and wrote that number on the application. Now the underwriter has to prove that. She'll do that by looking at last year's income to make sure you made what you said. She'll also look at this year's income to make sure you're on track to make about that same amount. That's why she asks for last year's W2 form (or sometimes complete tax returns) and your most recent paystubs (to see your year-to-date income). A good loan officer would have already collected this information knowing that the underwriter will need it eventually.
This process is repeated for each of the 4 factors we discussed earlier. She'll need bank statements to prove the assets you said you have. The bank will need to verify at least the amount you need to bring to the closing table for settlement. Some banks will need to verify "reserves". This is a safety net. If the worst thing happened and you lost income, would you still be able to make your payment? The bank wants to be sure of this in some cases so they'll require you to put anywhere from two to six months of monthly payments (reserves) away in a checking or savings account.
She'll pour over your credit report and ask you or the loan officer to explain any strange items. She'll do the same thing with the appraisal report to make sure that the appraiser is accurately stating value.
Most lenders tell loan officers that they do "common sense" underwriting. They say to ask ourselves the question "Would I lend money to this person and expect to get it back?" The truth is that if the bank decides during the process that the loan isn't as attractive as it started out or there are too many twists and turns, they will simply give us stipulations that we couldn't humanly get.
An example of this: I was helping an investor get a loan for a 4-unit property. Everything was going well. We sent the appraisal to the bank and they reviewed it. They couldn't find anything wrong with the appraisal but the house was in a not-so-desirable section of town. But it was a nice house, nothing wrong with it! We were scheduling the closing and coming very close to the deadline when the bank faxed us new conditions at the last minute. They wanted the appraiser to get pictures of every room of the house. There were 18 rooms. We were panicked because the appraiser was backed up and the seller was pushing us to close ASAP. We got it done but that was the lender's idea of saying "We don't trust that this house is in good shape." They couldn't believe that a nice house like that was available in that area.
The moral here is that surprises can and do happen. Imagine if that appraiser didn't know me as well as he did and didn't do me the favor of going out and taking those pictures. I would have had to go to my borrower and say "For reasons I can't control, I can't help you buy this house. You are going to lose it to the next bidder." As a consumer, I ask that you be patient with your loan officer and get the full story. Sometimes, things are out of their control.
This in no way should scare you out of dealing with a loan officer. On the contrary, it should give you an incentive to work with one. If you had been dealing directly with a bank and they pop a suprise on you, you don't have someone on your side pulling strings to get this done.
My coworker had a similar situation where the underwriter suprised her with impossible stipulations. She asked the seller to extend the deadline and was able to switch the loan to another lender to get it done. If you are working directly with a bank you have their loan products to choose from and that's it. Loan officers have the benefits of working with plenty of lenders at the same time.