What’s the Difference in Mortgage Underwriters?
The challenges of 2020 have impacted a record number of industries. But one industry still thriving is mortgage lending. This has resulted in a demand for Mortgage Underwriters. There are several different types of mortgages all requiring different types of underwriting.
I. Conventional Underwriter: This is a mortgage loan not originated by the government. There are two types of underwriters and loans: conforming and non-conforming loans.
· A conforming loan simply means the loan amount falls within maximum limits set by Fannie Mae or Freddie Mac, the government-sponsored enterprises (GSEs) that back most U.S. mortgages. The types of mortgage loans that do not meet these guidelines are considered non-conforming loans. Jumbo loans, which represent large mortgages above the limits set by Fannie and Freddie for different counties, are the most common type of non-conforming loan.
· Generally, lenders require you to pay private mortgage insurance on many conventional loans when you put down less than 20 percent of the home’s purchase price.
II. Jumbo Underwriter: Jumbo mortgages are conventional types of mortgages that have non-conforming loan limits. This means the home price exceeds federal loan limits. For 2020, the maximum conforming loan limit for single-family homes in most of the U.S. is $510,400. In certain high-cost areas, the ceiling is $765,600. Jumbo loans are more common in higher-cost areas, and generally require more in-depth documentation to qualify.
III. Government-Insured Underwriter: The U.S. government is not a mortgage lender, but it does play a role in helping more Americans become homeowners. Three government agencies back mortgages: The Federal Housing Administration (FHA loans), the U.S. Department of Agriculture (USDA loans) and the U.S. Department of Veterans Affairs (VA loans).
· FHA loans: Backed by the FHA, these types of home loans help make homeownership possible for borrowers who do not have a large down payment saved up and do not have pristine credit. Borrowers need a minimum FICO score of 580 to get the FHA maximum of 96.5 percent financing with a 3.5 percent down payment; however, a score of 500 is accepted if you put at least 10 percent down. FHA loans require two mortgage insurance premiums: one is paid upfront, and the other is paid annually for the life of the loan if you put less than 10 percent down. This can increase the overall cost of your mortgage.
· USDA loans: USDA loans help moderate- to low-income borrowers buy homes in rural areas. You must purchase a home in a USDA-eligible area and meet certain income limits to qualify. Some USDA loans do not require a down payment for eligible borrowers with low incomes.
· VA loans: VA loans provide flexible, low-interest mortgages for members of the U.S. military (active duty and veterans) and their families. VA loans do not require a down payment or PMI, and closing costs are generally capped and may be paid by the seller. A funding fee is charged on VA loans as a percentage of the loan amount to help offset the program’s cost to taxpayers. This fee, as well as other closing costs, can be rolled into most VA loans or paid upfront at closing.
IV. Fixed-rate Underwriter: Fixed-rate mortgages keep the same interest rate over the life of your loan, which means your monthly mortgage payment always stays the same. Fixed loans typically come in terms of 15 years, 20 years or 30 years.
V. Adjustable-rate Underwriter: Unlike the stability of fixed-rate loans, adjustable-rate mortgages (ARMs) have fluctuating interest rates that can go up or down with market conditions. Many ARM products have a fixed interest rate for a few years before the loan changes to a variable interest rate for the remainder of the term. Look for an ARM that caps how much your interest rate or monthly mortgage rate can increase so you do not wind up in financial trouble when the loan resets.
VI. Construction Underwriter: If you want to build a home, a construction loan can be a good choice. You can decide whether to get a separate construction loan for the project and then a separate mortgage to pay it off or wrap the two together. In general, you need a higher down payment for a construction loan and proof that you can afford it.
VII. Interest-only Underwriter: With an interest-only mortgage, the borrower pays only the interest on the loan for a set period of time. After that time is over, usually between five and seven years, your monthly payment increases as you begin paying your principal. With this type of loan, you will not build equity as quickly since you are initially only paying interest. These loans are best for those who know they can sell or refinance, or for those who can reasonably expect to afford the higher monthly payment later.
VIII. Balloon Underwriter: Another type of home loan you may come across is a balloon mortgage, which requires a large payment at the end of the loan term. Generally, you will make payments based on a 30-year term, but only for a short time, such as seven years. At the end of that time, you will make a large payment on the outstanding balance, which can be unmanageable if you are not prepared. You can use the balloon mortgage calculator to see if this kind of loan makes sense for you.
IX. HUD Underwriter: The Department of Housing and Urban Development (HUD) promotes homeownership among families in all income brackets. As a part of its core mission, HUD insures mortgage loans for families with poor credit or financial struggles, giving mortgage lenders an incentive to extend loans to borrowers with high default risks. As a type of subprime mortgage loan, HUD loans carry a unique set of advantages and disadvantages to borrowers, lenders, the government, and society.
· HUD loans serve a vital public service. By insuring high-risk mortgages, HUD gives a boost to homeownership rates across the country. Owning a home is an integral piece of the American dream, allowing families the ability to put down roots in a place they can call their own. Obtaining a mortgage loan can be challenging for individuals who have recently undergone a bankruptcy or defaulted on any type of debt. HUD loans are designed for people who are committed to financial responsibility and restoring their financial reputation.
· The Federal Housing Administration is the branch of HUD that insures HUD loans. HUD itself engages in a much wider range of activities, with individual branches set up for specific purposes. According to HUD.gov, the FHA has insured over 40 million mortgages since 1934.
X. Lender Appraisal Processing Program Underwriter: The Lender Appraisal Program (LAPP) is a program available to lenders that have met specific requirements. A lender must be approved by the Central Office. By using a LAPP lender, a VA assigned appraiser can close the applicant's loan, allowing for the loan process to be expedited.
· The program requires Staff Appraisal Reviewers (SARS) for the review of different property types: The SAR is the person that will receive an appraisal for review. When reviewing an appraisal, the SAR will make different assessments:
· Is the appraisal complete?
· Does the appraisal conform to industry practices and/or other VA requirements?
· Is the property value reasonable?
· After assessing if the appraisal meets the appropriate requirements, the SAR will send written notice to the buyer on conditions and requirements for the loan.
· There are four property types that are considered and reviewed by an SAR:
· Proposed Construction: Proposed construction is construction that has not yet commenced.
· Under Construction: After the first inspection phase has been completed, property is considered under construction. This classification also applies to those properties that had previously met the exception standards under the previously mentioned three compliance inspection section.
· New Construction: Once construction is complete or mostly complete (except for customer preferences) and is within a 12-month period, the property is classified as new construction.
· Existing Construction: After property is in the completion stage for over a year, and/or has been occupied by the owner, the property is classified as existing construction.
XI. DE Underwriter: A Direct Endorsement (DE) underwriter's basic responsibility is to review/certify mortgage loan origination documents for compliance with the requirements of the Federal Housing Administration's mortgage insurance program.
· Previously, DE underwriters were approved by the Federal Housing Administration (FHA); however, as of 1996, the FHA no longer approves individual underwriters. Underwriters are employed by the Direct Lender, and it is the lender's responsibility to ensure that the DE underwriter(s) employed by them meet the qualifications outlined in HUD Handbook 4000.4 REV-1. The lender must register employed DE underwriters with the FHA using the Underwriter Registry.