Updated: Jan 7, 2018
Underwriting: A Short History
If you've ever applied for a mortgage, an insurance policy or a car loan, your application went through an “underwriting process.” Ever wonder why the underwriting process was so intense and detailed? Well, here's a short history that puts it all in context:
The word “underwriter” dates back to the story of Lloyd’s of London, which is the world’s oldest continuously operating insurance company. Lloyd’s of London started as London coffee house in the shipping district of the city. “Underwriters” were individuals who signed underneath the line on the bottom of insurance contracts that insured the merchant ships. They offered their personal guarantee and took personal liability for the decisions they made… If the ship went down, and the cargo was lost, the underwriters had to personally pay the claim on the insurance contract. Needless to say, they took their job very seriously! One wrong decision could completely wipe them out financially.
Today, the underwriting guidelines for home mortgages in the US, are determined by Fannie Mae, Freddie Mac, the Federal Housing Administration (FHA), the Veteran’s Administration (VA), the Rural Housing Service (RHS), and the US federal government itself, through the Dodd-Frank Rules and Regulations. Because Fannie Mae and Freddie Mac buy the mortgages, and because the FHA, VA and RHS guarantee or insure the mortgages, these are the organizations that set the underwriting guidelines in the US. Like those “underwriters” several hundred years ago in the city of London, these folks are the ones who are on the hook if the mortgages go into default.
Now of course, the banks and mortgage companies also have some liability as well. For example, if a mortgage goes into default due to some negligence on the part of the mortgage company, Fannie Freddie, the FHA and US government can all go after the mortgage company for damages. They can require the mortgage company to buy back the loan or pay penalties. THAT is why the underwriting process is so intense and detail-oriented. Please contact me if you have any questions or for further information.
Same Guidelines, Different Results
Have you ever been turned down by one lender, but approved by another? Have you ever been pre-approved for different loan amounts by different lenders? Or maybe one lender required you to pay off debts to qualify, while another lender didn't?
If the guidelines are set by the Agencies mentioned previously, then why doesn't each lender have the same answer? Well, simply put, the lenders interpret the guidelines differently and have varying levels of risk tolerance. Furthermore, certain lenders have what's called "overlays," which are additional rules, policies, or guidelines on top of the Agency's guidelines. The more overlays a lender has, the more conservative they are in their underwriting. Borrowers with irregular income sources or blemishes on credit, for example, are less likely to be approved by lenders that have a low tolerance for risk.
This is why working with a broker who understands underwriting is so important. Here's an example:
A couple years ago a borrower who was already pre-approved with another lender approached me for a second opinion. The other lender required the borrower's parents to be on the loan to help him qualify due to an irregulare self-employment history. I was able to place him with a different lender who qualified him without his parents. Needless to say, he and his parents were ecstatic.
C2 Hawaii works with over 80 lenders, and each one is little different when it comes to qualifying a borrower. Let us leverage our experience and place your loan with the best lender that will deliver the results needed to get you into a home.