A new study suggests that one of the reasons many subprime loans have failed is very weak underwriting.
Underwriting is the process by which a lender decides whether a borrower is a good risk. It involves looking carefully at the paperwork provided by the borrower, including a signed loan application, bank account statements, paycheck stubs, tax returns, profit and loss statements (if the borrower is self-employed) and a review of the appraisal of the property obtained by the bank.
Underwriting also includes "verifications." The loan officer is supposed to call your bank and verify the amount of cash you have in your account. He or she is also supposed to call your employer to verify your employment history and income information. If the information you've put down in your application can't be verified, the loan officer is supposed to reject your loan application.
This isn't what happened in the subprime market. In some cases during the past several years, if a borrower's information couldn't be verified, the loan became a "stated income" or "no doc" loan. The borrower simply paid a higher interest rate and fees, and little if any verification was done.
As a borrower, you want the lender to be sure you're qualified to borrow the amount you have in mind. You want to know exactly how much you'll owe each month, and for how long.
Underwriting the loan is perhaps the most important thing a mortgage lender can do, and we've all seen the results of poor underwriting: a high rate of foreclosures and defaults.
When choosing a good mortgage lender, whether you choose a mortgage broker or a mortgage banker, you'll want someone who can do the job right. Finding a lender who will take the time to make sure you understand the loan programs being offered, and who will help you decide which loan best meets your needs, is the key to a smooth closing.
As with finding a good real estate agent, start looking for a lender by garnering recommendations from your friends, family and work colleagues. If you are working with a real estate attorney, he or she should have the names of loan officers who do a good job for their clients. Your real estate agent, if a professional, will have a list of mortgage lenders the company does business with.
Beware of real estate agents who proffer the name of only one mortgage broker or lender, particularly if that lender is an in-house mortgage broker. The in-house lender might not be a bad lender, but you need to make sure you find the best lender for your circumstances and lending needs.
