What is Underwriting?
Underwriting is the process of evaluating a borrower’s credit, income, assets, and collateral to determine the creditworthiness of a borrower. As the underwriter for Rehab Financial Group, LP, I make sure the borrower has the ability to repay their loan with a minimum risk of default.
Is Credit Just a Score?
When reviewing credit, I am always looking for a good credit score, however, not everything is based on just the credit score number itself. I am specifically looking to see how the borrower has managed their finances over a period of time. An on-time payment history, with no mortgage late payments, foreclosures, bankruptcies, judgements or liens in the past two years is a solid, clean report. If there were minor issues such as a late payment or two, I may still approve a loan. In a situation where a borrower has had a more major credit blemish, I need to determine if it was an isolated incident or a pattern of behavior.
I take into consideration the big picture of evaluating credit, income, assets, collateral and experience level. The credit report tells me a lot about how a borrower has managed his finances over a long period of time. His debt to income ratios demonstrate the ability to pay back the loan. The assets need to be sufficient to cover closing costs and reserves.
When I refer to reserves, I want to make sure the borrower has enough cash on hand to manage his current monthly obligations, our loan payment and any unforeseen issues that may need additional funds throughout the project. An appraisal is obtained on every loan to determine the as-is and after rehab value (ARV) of the property.
Banks Treat You Like a Number. RFG Wants to Know Your Story.
When I am reviewing a file, I am, in essence, piecing together a story for every borrower. No two stories are the same. I don’t like to remove the humanity from a transaction by considering only numbers. I want to get to know the people behind the numbers. For instance, I had a couple come to me and they had a bankruptcy that was over two years old. One of them had gone through a battle with cancer and was not able to work for a long period of time. Thankfully, he fully recovered and was back to work full time. They were forced to file for bankruptcy protection which impacted their credit. They came to me and from the beginning, they were open and honest about their situation. I could clearly see this was an isolated incident due to unforeseen circumstances. This was demonstrated clearly on their credit report.
Since the time that their bankruptcy was discharged, they had all on-time payment history. I had a good comfort level with these borrowers and I approved them for a loan. One of the critical things that helped me make my decision was that the borrowers had fully disclosed all of the details on how the events transpired. It is always better to be honest and upfront with the underwriter from the beginning. . . you help him or her to really understand your personal story.
Be Upfront With Me, So I Can Help You Now (or in the Future).
Not every story is one that I can make an exception for. For instance, I had a borrower come to me to that had a foreclosure that was over five years old. I had asked at the preliminary interview if all had been paid on time since this event. The borrower replied that it had been. When I ran the credit report, I saw multiple late payments and collections after this foreclosure. This was not an isolated incident, this demonstrated a pattern of how the borrower was managing his finances. There was also a large deposit into his bank account for $50,000. This made up almost the entire balance in his account. He had borrowed $50,000 from a friend to show enough reserves to get qualified. I cannot allow someone to borrow money to close on our loan. He then said the money was a gift meaning it did not have to be paid back.
I let him know that we would require the gift donor to sign a gift letter stating this. In the end, he could not get the letter because it was not really a gift and a reasonable person expecting to be paid back would not sign this. The rule of thumb is you never take a loan out from someone else to close on another loan. It’s a recipe for disaster. There was a lot of back and forth on this loan. Had the borrower been upfront about his situation, it would have saved everyone a lot of time. Underwriters have safeguards in place in mitigating risk. It’s never good to bend the truth or withhold information. 99.9% of the time these things come out in the end.
It’s important to know that even if a borrower does not qualify for a loan at the present moment, you can always ask your underwriter what you can do to get you started on a path of improving your situation. This could include cleaning up your credit, saving more money, etc. If you get that dreaded denial letter, take the time to ask your underwriter the reasons you were denied and if they can offer any advice on how to put a plan in place for future approval. We all do better when we know better. Knowledge is power.
A Risky Loan Hurts Everyone.
We try to take every precaution to make sure we are putting people in good loans. The lender only succeeds if the borrower succeeds. There is nothing more satisfying to me than approving a borrower and seeing them succeed on their projects. This is the basis for a long term business relationship!