Red Flags

Underwriting is more than the process of working through numbers. It also includes a fair amount of detective work. An underwriter looks for clues that could lead to a discovery that the real overall profile of the applicant isn’t exactly as presented. This can lead to delays or worse a declination.

We can make the underwriting process run smoother if we identify these clues before submitting the file instead of waiting for the underwriter to raise the questions.  What we want to find are attributes that on the surface seem innocent but can be a flag to something that can inhibit an applicant from obtaining financing in a timely manner.

Depending on the nature of the flag either a written explanation or additional documentation will need to be provided. By taking the time to explain to an applicant the reason for the question, a more complete answer is provided. We’ve found that time invested early in the process is time well spent. Applicants understand that questions raised prior to submission are presented to get a more complete picture of their situation. Questions raised later in the process by an underwriter makes applicants feel threatened. They are being pressed to “prove” themselves instead of “explaining” themselves.

We’re now going to discuss some of the less obvious red flags that we look for than can cause serious problems in the mortgage process.

Buyer currently lives in property: Your client is buying from his current landlord or a family member. This is no longer an arms length transaction (a purchase transaction between two disinterested parties) and therefore may be at a sales price that is not truly reflective of market values. There will also be a question regarding the down payment.

Down payment is a gift or promissory note: Additional documented proof will be needed to meet secondary market requirements.

Unrealistic commuting distance to work: If your client is purchasing a home that will extend his commute to work excessively, he could be purchasing an investment property and simply claiming that it will be his primary residence.

Borrower holds stock in employer or holds an executive title: Is this client an employee or is he considered self-employed? The difference in the documentation required can cause what seems to be a qualified purchaser to get declined.

Payment shock: Is the proposed housing expense in excess of 150% of the current rent?

Unreasonable relationship of income to assets: You would expect individuals with a substantial annual income to have a substantial net worth and vice versa. It should raise a question if there is no relationship here.

Liquid assets: There is a significant change in the liquid asset of the applicant over the last 2 months.

Verification of Employment: Applicant brings copies of pay stubs (instead of originals) and numbers don’t line up properly, numbers seem to be round numbers or the withholding tax for social security is based on the wrong percentage. Borrower doesn’t receive (or keep) computerized pay stubs and brings a letter from his current employer instead.

Tax Returns: Is the magnitude of the dividend and interest income in line with the assets shown on the application? Is there a deduction for mortgage interest or property tax and the borrower claims he is currently renting? Are there properties listed on the return that don’t appear on the application. Does a professional tax preparer sign the return or did the applicant file it himself?

Contract of Sale: The seller is a realtor or a relative of the buyer. Contract is subject to seller acquiring the property. Contract referenced riders that are not supplied with the contract.

This was not meant to be an all-inclusive list. These are just some of the flags that will require attention before an application is submitted. Anything that raises a concern should be addressed before submitting the package. It makes for a faster closing.