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Real Estate News

Some Are, Some Aren't

Written By: David Reed
Wednesday, May 11, 2022

When your lender sends you what the industry refers to as a good-bye letter, it means your loan is being sold. More specifically, the servicing rights are being sold. Servicing rights simply means who collects your mortgage payment on behalf of the owner of your home loan. Lenders need to be able to sell loans so they can regenerate cash in order to make more loans. Makes sense, right?nbsp;

If a mortgage company didnt have the ability to sell loans, theyd soon run out of money. So the act of selling a mortgage keeps the mortgage market healthy and liquid. But lenders must first follow certain rules when makingnbsp; a home loan in order for the loan to be in a position to be sold.

Some of those loan requirements are steadfast and some give the lender a bit of flexibility. For example, lets consider debt ratios. Lenders are required to prove affordability to make sure someone isnt borrowing more than they can handle. This is done primarily through the use of debt ratios. Most loan programs have two debt ratios, a housing ratio, or front,nbsp; and a total debt ratio, or back.nbsp;

A common front ratio is 31 for a particular loan program. This means the housing payment, including taxes and insurance, needs to be 31 of gross monthly income. A back ratio might be 38. But lets say the total mortgage payment comes out to a 35 ratio and the back at 42. What happens? Does the borrower have to pull back and borrow less or maybe pay discount points to lower the rate? Not necessarily.

The underwriter at the mortgage company, the person that approves the loan file, can make a personal judgment allowing the mortgage to ultimately be approved even though the front, the back or even both ratios are above the standard. When doing so, the underwriter looks at other positive factors within the file. A solid credit score might help an underwriter push the loan through or perhaps a well-estabished employment history. These compensating factors can be used to approve a loan even when the debt ratios are in fact a little high.

On the other hand, some guidelines are hard and fast. There is no leeway and the guideline must be followed or else the loan is stopped in its tracks. What sort of guideline might this be? One is occupancy. Lets say a couple is buying their first home. But they first want to buy a rental property. Sorry, but this cant be done.nbsp; it has to be an owner-occupied unit in this scenario. The lender has no authority to override such a requirement.

If, in such a situation the loan gets stopped, the loan officer will then work with the applicants and explain what needs to happen to get the loan application past the goal line. The applicants will be told what can be ignored and still get the loan approved and what has to happen before the loan can go any further.

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