S2E5 – The Underwriting Process Of Buying A House

Are you a first time home buyer wondering what goes into the underwriting process when buying a home? What is underwriting and why is it important? How is different from getting pre-approved? What happens during the underwriting process? What does the underwriter review when deciding on whether or not to approve your mortgage loan? In this episode, we take a bird’s eye approach to the underwriting process to cover the 4 C’s of underwriting to help you become The Educated HomeBuyer.

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Connect with me 👇 Jeb Smith (huntington beach Realtor/orange county real estate) DRE 01407449 Coldwell Banker Realty ➡I N S T A G R A M ➳ https://www.instagram.com/jebsmith ➡Y O U T U B E ➳https://www.youtube.com/c/JebSmith

Connect with me 👇 Josh Lewis (Huntington Beach Certified Mortgage Expert) DRE 01209148 Buywise Mortgage M:714-916-5727 E: josh@buywisemortgage.com ➡I N S T A G R A M ➳ https://www.instagram.com/borrowsmartjosh ➡Y O U T U B E ➳https://www.youtube.com/c/buywiseborrowsmart

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For Show Notes, See Below 👇

[00:00:00] Jeb Smith, Huntington Beach California Realtor: What is underwriting? Why is it important? That’s what we’re gonna dive into in today’s podcast. We’re gonna talk about the four Cs of underwriting, and even though it’s not something you deal with directly as a buyer, a seller in the real estate market, it’s important to know what goes into the underwriting process so that you know you can control what you can control, right?

You don’t know what you don’t know, and that’s why we’re here to help explain it. So Josh, , walk us through the underwriting process. I think starting with the first question, what is it? And why it’s important.

[00:00:34] Josh Lewis, California Mortgage Broker: I have two types of clients. Ones that have no idea that underwriting exists and no concern about it, and others that are like panicked.

“Okay, so you pre-approve me, but what if the underwriter doesn’t agree? What does the underwriter think? What if it doesn’t make it through underwriting…” You hear that term underwriting happens in other industries, insurance underwriters, I’m sure many other industries… 

 In essence, you may want to know, “what was the purpose of the pre-approval, if I have to go through underwriting?” The pre-approval is your loan officer going through, reviewing all your documentation, all the things we’re gonna talk about, and confirming that you meet the loan program guidelines, whether you’re looking for an FHA loan, a jumbo loan, VA, USDA, conventional, they all have different guidelines across all of these aspects, so they’re helping you determine with your qualifications, which one of those programs is the best fit for you, because A, you can qualify for it, and B, it’s the best terms of all of the loans that you qualify for. 

So what is the underwriter doing? The underwriter is coming after the fact and essentially checking the loan officer’s work. It’s not that simple because we can’t go directly to underwriting from a pre-approval because there’s some additional information to gather.

Briefly just wanted to remind you that there’s processing that goes in the middle, and that’s generally not your loan officer. It’s someone that works with them in the office to process that file and gather all of the documentation that the underwriter needs to make a decision. So the pre-approval, I know income, assets, credit, but we don’t know anything about the property. 

So primarily the processor, they may be sending out verifications of employment, but they’re gonna order and gather the appraisal. They’re gonna get the preliminary title report. And all of that stuff, once it’s in the file, goes to the underwriter to check and confirm and ensure that that loan meets the loan program guidelines and that the investor that it’s going to will buy it.

And the agency that it’s assigned to, FHA, VA, Fannie, Freddie will insure the loan. So in a nutshell, that’s all it is. It’s confirming that you meet the guidelines for the loan and that the loan will be saleable in the secondary market. Because for the most part, Jeb, we don’t have portfolio loans anymore. 90% plus, probably 98% plus of loans are sold in the secondary market, not held in portfolio.

So it’s not necessarily up to a person like 25 years ago it would be an underwriter at the bank could make the decision however they want to. You’re a longtime customer with big assets. They could make an exception in your favor. We don’t have much of that anymore. 

[00:03:09] Jeb Smith, Huntington Beach California Realtor: What I’m hearing you say is the underwriter holds a lot of power. I mean, I remember back in 2006, 2007, you know, you’re working with an account executive. Those are back in the days when I actually did loans and you get a loan and it would get denied for whatever reason, and you could talk to your account rep, and your account rep would go back and talk to the underwriter.

And then the loan would be approved just by having a conversation, maybe see if it could go out for an exception or whatever. But the reality is, it was easy to get changes or to get that underwriter to change their mind. Now I don’t know if the process is like that these days. I imagine it’s not quite as easy. 

There’s a lot on the line there with regards to these underwriters in the secondary market and all of that. But what are these underwriters looking at? We know they’re looking at your work, right? What you’ve done, you’ve calculated income, you’ve checked the buyer’s assets, you’ve looked at their credit and you’ve said, “Hey, listen, they fit in this box, so I know, based on my calculations, they go to this box.” and so are they just checking your work or is there additional stuff that goes into it? 

[00:04:11] Josh Lewis, California Mortgage Broker: They really are checking your work. If we’ve done our job, then everything is there and they are just confirming that we meet the guidelines. If we’ve missed something and say, “Hey, this wasn’t addressed at all, here’s a condition, go out and get me that information.”

So in that situation, it’s not really checking the work, it’s saying, “Hey, you, you skipped a step or you missed something, please get me this so I can make that confirmation.” 

Going back Jeb to remembering 15, 20 years ago when we had a lot of private loans, so not just subprime, there were other Alt-A and other types of investors out there. The investor could make the decision, ” are we okay with that risk? Will we go outside the box on that?”

When we’re talking agency loans? Fannie, Freddie, FHA, VA, USDA, the guidelines are written in stone. That doesn’t mean that we, and our account executives and the underwriting managers don’t ever sit around [00:05:00] and debate this stuff, cuz some things you’ll see as we go through this are in a gray area, so they’re not black and white, so we have to fight it out.

We talk a lot on here. I’m a broker. The reason why I believe that brokering loans is better is we’ve got 50 different lenders to send a loan to. And we do regularly have loans that many of our best priced lenders, they’re cherry picking everything that’s black and white. They don’t want any shades of gray. And then we have other lenders that maybe don’t have the best pricing, but they’re comfortable with those shades of gray.

So that’s part of what we’re selecting. If your file isn’t perfect, black and white, we’re going, “where can we send this that get you the best terms with the least stress and the least headaches?” And a lot of that refers back to underwriting. So Jeb, we’re gonna talk about as you said, the four Cs. The four Cs are capacity, capital, character, also can be called credit and collateral. 

Now, the important part is we’re not gonna sit here and spend two hours cuz we easily could in walking you through all of this. We’ve already done two full episodes on credit. You can go back and watch both of those. We do a really deep dive on that.

We’ll probably do a deep dive going forward on income, the capacity element there, because there’s so many questions that we get on that… “well, I have this weird situation with the income….” so we can’t go through all of those, but I’m gonna walk you through in general what the underwriters looking at with regards to capacity.

[00:06:14] Jeb Smith, Huntington Beach California Realtor: I’m glad we’re not doing two hours on this, because not only would the listeners be bored, I would be bored over here too, listening to you talk for two hours, even though it’s informative.

Something I wanna mention here, and I think it was left out is that the underwriter is checking the work of the loan officer that preapproved you. There’s something that, that needs to be stated here and that’s the information that you’ve been pre-approved on is only as good as the person that asks you for that information.

So if you’re getting pre-approved through Josh, and he’s not checking all of the boxes, he’s not looking deep at the income, he’s not looking at the credit. He’s not, you know, If there’s Something doesn’t check the normal boxes and he’s not requesting that, but he’s saying you’re pre-approved and then it goes to the underwriter, that’s where there could be issues. 

So you really want to make sure you’re working with somebody upfront, a professional that has experience that knows what they’re doing so that when they tell you that you’re pre-approved, you can pretty much guarantee it even though it hasn’t been through underwriting.

Because what happens, unfortunately in this industry, there’s a lot of people out there that got in the business and haven’t been in it very long or skipped steps for one reason or another, and they say, you’re approved. And then it goes to the underwriter and the underwriter says, “no, you didn’t do this correctly. You didn’t do that correctly. We need this. Or, You’re just not approved for one reason or another.”

So I wanted to take the time just to make sure if you’re going through this process, depending on where you are, just make sure you’re working with somebody that knows what they’re doing, a professional in the industry, has experience, can really take you through the process and make sure you know that what they say is the word if you will.

So Josh, you wanted to talk about the four Cs. Let’s start with capacity. 

[00:07:58] Josh Lewis, California Mortgage Broker: Perfect. Fancy word for your ability to repay the loan. Again, going back in time 15, 17 years, we had stated income loans, stated asset loans, which was basically we’re throwing out the four Cs or the four legs of the stool.

When all of them are solid, the stool is solid. It doesn’t fall over. When you start kicking out legs you have a much less stable stool. And income may be the most important. They’re all important, but income may be the most important, and now we actually have laws that a lender must confirm your ability to repay. And the number one way of doing that is going through what is your income. 

So what is an underwriter checking in my work? They want to check that I’ve calculated your income correctly. Now sometimes this is incredibly simple. I have a loan that we opened this morning, the woman makes $215,000 salary. Anyone can look at that pay stub month after month after month. It’s one 12th of $215,000. It’s way more than she needs to make to qualify for the loan. It is very clear what it is, and there’s no questions. 

I’ll use another example of another client who got an offer accepted this week, and for them, she works two jobs, so now this increases the complexity. To use a second job we have to have a two year history of that. So we had to send out verifications of employment for this to confirm the start date, to make sure she’s worked both of those jobs for two years. Now she doesn’t work 80 hours on both of these jobs, or 40 hours for a total of 80 hours on each job. Both of them are less, and they vary.

So that again, is where variable income, we generally are gonna need a third party verification. Your employer is gonna go through and tell us how many hours you worked, what your base pay was, what bonuses, commissions, overtime, any of those things that vary, that need to be averaged over time. 

So, the underwriter is confirming that that calculation is accurate and we have all of the documentation, whether it’s pay stubs, W2s, tax returns, verifications of employment, everything in there lines [00:10:00] up, and that we have a rock solid, accurate, calculation of income and that income when we line up the house payment and all of your other debts meets the debt to income requirement for the loan.

[00:10:12] Jeb Smith, Huntington Beach California Realtor: Is it fair to say, Josh, that that’s probably where most inexperienced the loan officers would screw up a file is when calculating income? 

[00:10:22] Josh Lewis, California Mortgage Broker: Yes, and partially because it’s the most complex and secondarily, it is fixed. It is set in stone. There’s nothing that at this point in time that I or the borrower can do to change it. It’s a historical fact what we’re looking at, other than if their boss loves them and wants to help them buy a house, and I’ll give you $2,000 a month raise to get your debt to income ratio in line. 

If your loan officer screws that up and the underwriter goes through and determines, no, you were wrong on the calculation, it’s actually $1,100 less monthly income for this family.

It’s a problem. You’re painted into a corner. There’s not a lot of workarounds for that other than potentially switching to another loan program that allows higher debt to income ratios. 

[00:11:02] Jeb Smith, Huntington Beach California Realtor: Good stuff. So, what else goes into capacity? You said income. 

[00:11:06] Josh Lewis, California Mortgage Broker: We’re really just looking at the income but the second piece of that is the employment history. So we just talked about that second job for that borrower. We had to verify that she had been working the job for two years. Reason for that is with a second job, they don’t want you going out and going, “Hey, I don’t qualify for a home with my 40 hour a week job, I’m gonna go get a second job working 30 hours a week.”

Well, most people don’t wanna work 70 hours a week. So if they allowed you after one month to use that income, you can qualify, get into your home, quit that job. They don’t wanna see that. So the rule is two years on that. In general, the rule for employment is we need to have two years, but this is a somewhat gray area and I get a ton of questions on this.

Someone will say, I had a baby and I was off for a year and I’ve only been back to work for six months. Well, it’s a valid exception. We can go back prior to your year off from maternity, paternity leave, family medical leave Act. That’s a valid reason for being out of the workforce. People with COVID, now we’re getting a little far from that 2020 timeframe when people really had disruptions in their employment, but they would come back and say, “well, I lost my job and I’ve only been on the for nine months.” 

Okay, with almost every program that’s acceptable. And we have a very good and valid explanation of why you lost your job. It wasn’t, hey, you were staying out till midnight and coming in drunk at the office and got fired. The pandemic hit and lots of people lost their jobs. Sounds more fun than, than the pandemic.

But those are the things that, that we’re looking at. So are gaps of employment going to kill you? No, but if you have a gap of employment every three months, you lose a job and you’re out for a month or two, that’s gonna be a problem. Did you change industries? Did you change job titles? So, let’s say you are an auto salesman and then you go and you work for enterprise rent a car in fleet sales.

Technically it’s a different job, but it’s sales, so it can be OK. It can be a problem. So those are the things that we’re looking for. And Jeb, going back to earlier in the conversation, people often ask me, “how often does it happen that you pre-approve me and then we go to underwriting and the underwriter disagrees?” And I say almost never, can’t say never, but 99% of the time it, they’re gonna see it exactly like I do.

And the 1% of the time when there’s any dispute, we do not get blindsided by that. I or any other loan officer should know if there’s any gray areas in here. And Jeb, that’s kind of where we go into, and I hadn’t thought about it in the context of this conversation, but we can do what’s called a to be determined underwrite, where your pre-approval can be validated by the underwriter before we even get a property.

So they’re not gonna cover the collateral, the property, but they’re gonna cover your income, your assets, your credit, and say, “yes, I agree with all of this.” So the reason why we never have that problem is if I get any inkling that there’s gonna be a problem with income, with assets, source of funds, credit, any of that stuff, generally income and credit are the ones where we wouldn’t know for certain that the underwriters are gonna be on the same page with us we can send the file in ahead of time and get the underwriter’s stamp of approval on it before you even go looking at homes to relieve that potential stress. 

[00:14:09] Jeb Smith, Huntington Beach California Realtor: That’s important to note. Like if there’s any question in the file at all, that gray area, if you will, your mortgage professional should be getting the opinion, in writing or whatever it is from an actual underwriter. Because you could send these files to a lender prior to finding a property just to make sure things are the way that, that you’re calculating them to be so that you don’t have these unforeseen issues. 

 So that’s gonna take us into the second C, Josh. So we talked about capacity, which was income and employment. Second C is going to be capital. Capital… what Down payment, closing costs. Is that what we’re talking about? 

[00:14:44] Josh Lewis, California Mortgage Broker: Exactly. So when we go through and qualify you for the loan, we’re gonna say, “okay, after looking and reviewing everything, it appears as though an FHA loan is the best option for you and your family. So with an FHA loan, and if you qualify for $475,000, here’s the three and a half percent down [00:15:00] payment. Here’s what the closing costs look like. Here’s what the prepaids look like, and if you were responsible for everything, here’s how much we need.”

So now we gotta ask the question, do you have it? If you do not have it, where can we get it? And are all of those sources acceptable? 

So that’s really what this process looks like. So oftentimes with our FHA buyers, we’ll have them say, “Cool, I can do the three and a half percent down payment. I don’t have an extra nickel.” In the current market where it’s more balanced between buyers and sellers, we can arrange and make sure that their realtor knows we need $12,000 to cover everything above and beyond the down payment.

And we can ask the seller for that and if we get it perfectly acceptable source of funds and their documented three and a half covers our end. You know, we go back during covid when rates were really low and it was a market tilted heavily in favor of sellers. You couldn’t get a seller credit.

So what we were doing with that was a lender credit. So instead of the amazing 2.75% interest rate, maybe you get 3.125% and we’re getting you $10,000 credit at closing. So seller credits, lender credits, those can all be acceptable sources of funds for getting you down to your investment. So you’re always gonna need to come up with a down payment. Everything above and beyond the down payment can come from seller or lender credits. 

So what if you don’t have the down payment or you don’t have it sitting liquid, or you have it in cash under the bed? Which I spoke with a client yesterday. He’s got $20,000 in cash at home and $10,000 in the bank. Now we get into situations where technically, cash on hand can be an acceptable source of funds. I would prefer that you get it in the bank and source and season it. So now we just threw out a bunch of terms there, Jeb. People go, “what in the heck does that mean?” 

Seasoning means that you’ve had the funds in your bank account for more than two statement cycles. And the reason why we say more than two for our loan, we’re gonna need your two most recent bank statements for most loan programs. So that goes back at least 60 days, and that assumes that you got your statement, your most recent statement yesterday. 

Let’s assume we’re getting a lot of credit unions do an end of month statement. So if I collect, like I did from a borrower yesterday, the two most recent statements, I’m going all the way back. I got November and December, so we’re back almost 90 days. 

So let’s say that they had $20,000 under their bed in November. And they put it in the bank, we’re gonna see a large deposit. That large deposit has to be explained, and it has to be from an acceptable source of funds.

So if you have large chunks of cash, if you are comfortable with it, it is better to get them into the bank, have it there for two full statement cycles so we don’t see that large deposit. 

Why are large deposits, Jeb, important or problematic? Underwriters will assume the worst when they see something that they can’t explain or don’t understand. They think you may have gone out and got a $20,000 loan from someone, whether it’s a personal loan or just a loan that hasn’t shown up on your credit, and therefore we have a debt, an outstanding monthly payment that we’re not accounting for. So that’s why large deposits, large transfers, money moving around, they’re gonna ask, “What is this? What’s going on? I need to understand and make sure there’s no undisclosed debt.” 

[00:18:07] Jeb Smith, Huntington Beach California Realtor: And how does that relate to gifts? Are gifts considered the same way? Are they documented in this piece of the C puzzle with regards to capital? 

[00:18:15] Josh Lewis, California Mortgage Broker: Yep. And it, it varies from program to program. Nearly every loan program except for jumbo programs and also on the non QM loans, your bank statement, DSCR stuff, they will be a little pickier on gifts, not to say that they’re not allowed. But for FHA, VA, Fannie, Freddie you need none of your own funds. All of your funds to close can be gift funds. Now, how they are sourced and seasoned are different depending on the loan program.

FHA would be probably the strictest example. They require us to document your donor’s ability to gift. So that gift letter is essentially gonna tell us who the donor is. Is there an acceptable relationship? It can’t just be your buddy. They have a list of acceptable gift donors, so we go through and complete the gift letter, tell ’em what bank account it’s coming from, when it’s gonna be given, ahead of time or at close of escrow, what account it’s coming from, how much it is, and how the contact anyone in case the file gets audited and anyone has any questions and wants to confirm that this person actually gave the gift.

So, Confirming donor’s ability to gift is required on FHA even if they wire directly into escrow, we will have to get at least one month’s bank statement or a letter from the bank manager stating that the donor has that money seasoned in the bank and ability to give to you. And the reason for that, FHA is trying to avoid the $20,000 under the bed being given to your mom, and your mom wires it back over and says she’s gifting it to you.

So now we just magically sourced and seasoned $20,000 of mattress money. Not to say that doesn’t happen, but that’s their goal of trying to avoid that. Now on conventional loans, much, much easier. We get that gift letter. And again, remember the gift letter states what account those funds are coming from and whose account that is.

As long as we have a wire in to escrow at close of escrow [00:20:00] that matches up to that account, they will accept that as the donor’s ability to gift. So those are the things that we’re looking at. Do you have enough money? Did it come from an acceptable source? And also going through your statements and just confirming there weren’t any large deposits, unexplained transfers. 

Like if we provide those two month statements in both months, there’s a $500 Venmo to Betty Sue. They may ask, what is this? And they’re not gonna necessarily make you document it, but they wanna make sure that, there’s not undisclosed child support, any undisclosed debts that we’re not counting in your debt to income ratio.

So while we are determining that you have sufficient funds to close, they’re also gonna be looking at that and just make sure there’s nothing out of line or abnormal in your bank statements. 

[00:20:46] Jeb Smith, Huntington Beach California Realtor: No, they’re trying to get a full picture. If you’re hiding something, they’re gonna find it. They’re like PIs when it comes to, uh, your life, which is gonna take us into the third thing, which is, character, also known as credit. Right? What is the underwriter doing to verify credit? Because that’s just a score, Josh? I mean, my score says it’s 750. Okay, now what?

[00:21:05] Josh Lewis, California Mortgage Broker: I will say that paradoxically credit is the simplest and can be the easiest to trip up an inexperienced loan officer.

The credit algorithms, the way they code things have gotten better over time so that the automated underwriting systems can see and understand most of what’s in that file. But there are still examples where, like you said, we can have a borrower with a 700 credit score that can have something that happened in that credit file that would disqualify them from the loan but isn’t picked up by the automated underwriting algorithm. 

So you have a decent credit score, you have an approval, but you have something in that report that would disqualify you. A forbearance that doesn’t get picked up by the model. And would disqualify you. Not saying that it always disqualifies you, but it could.

So it is very important that your loan officer doesn’t just get your application, put it into their system, push the button, order the credit, populate your liabilities, see my credit score’s good, my debt to income ratio is good, hit the button to run automated underwriting and go “approve eligible”. 

They actually have to go through that line by line. Just make sure there’s nothing funky out of line, out of place that would be problematic. And probably Jeb, the biggest area that I see potentially being a problem now is just the fact that are the scores valid and what do we mean by valid? It’s a score. I have it, it’s there, it’s gotta be right, right?

I have a file right now that husband and wife, they’re older, their son-in-law and daughter handle their finances for them. And about 10 years ago, things got outta control before they turned over their finances and they filed bankruptcy. So after 10 years, your credit report doesn’t show a bankruptcy, but they didn’t really reestablish. They only used authorized user accounts

of the son-in-law and daughter since that time. And they did keep their mortgage, they kept their house, they paid their mortgage, and we’re trying to refinance their mortgage. After a mortgage has been discharged in bankruptcy, they can no longer report to your credit, so we don’t have a rating for that.

We have two accounts. The two credit cards that they use that are technically authorized user cards, even though they are solely used by our borrowers. Well, we get through underwriting and they come back and say, “we don’t think those are valid credit scores. We don’t have any of their own credit. The only two accounts we see are authorized users.” 

So we had to go and get them essentially 12 months of statements from their accounts showing those credit cards are paid out of their account, showing we have multiple utilities paid out of their account, showing that they paid the mortgage that’s not rated, that they’ve paid that on time for the last 12 months showing that yes, that is a valid score for them. 

And if we hadn’t been able to document that, if they had not used any credit and those two authorized user cards were not used by them and paid by them every month, we could have had a problem.

Probably one that’s a little more common, Jeb, the things that can be more common that are bugaboos here that are easy to overlook. 

[00:23:57] Jeb Smith, Huntington Beach California Realtor: Did you just say bugaboo? 

[00:23:58] Josh Lewis, California Mortgage Broker: Buggaboo. I like it. It’s a good word. 

So that that can trip you or your loan officer up. We’ve all seen Experian Boost. They pitched to this wonderful thing. There’s nothing technically wrong with Experian Boost, but some loan programs, and they’re typically jumbo loan programs, will say, we think you’ve manipulated your credit score. You have to remove the Experian boost and rerun the credit. So, I’m not a big proponent of Experian Boost, primarily because it’s only one bureau.

If you could do it to all three bureaus and bring them all up, 10, 15, 20 points, great. The likelihood that Experian is your median score or your low score, and it will become a new higher median, significant enough to change your mortgage is pretty minimal. And it just sort of clouds your credit file from our perspective.

Not clouded in a bad way, like it’s ever gonna prevent you from getting a. It makes it more complex than it needs to be. So that’s the important stuff. But you already hinted at Jeb. Credit is generally easy cuz it is just a score and 99% of the stuff gets picked up by the automated underwriting.

[00:25:00] So it’s hard for a loan officer to screw up or miss something here. Some of the areas that we see that are tricky right now, student loans. You know, Jeb, what’s going on with student loans? Since the CARES Act, every student loan in the country, whether you want it or not, is in forbearance, I should say, every federal student loan. So it shows a zero payment. 

Well, with a zero payment, we can’t use that. We have to document what the actual payment is, and that, again, a whole nother episode on income-based repayment and how that works. But it triggers more documentation, and I get a call probably once a month from someone who their loan officer didn’t look at it and they ran it through and they didn’t see there’s $200,000 of student loans with a $0 monthly payment that we cannot use, and the actual payment is $212 or $1,212. That can be a problem. 

What we haven’t seen, because the economy’s been pretty darn good for the last 10 years, bankruptcies and foreclosures. The way they report and the way things show and waiting periods and timelines on that can be tricky and difficult. It’s really important that the loan officer go through and look at those. For the most part, they’re coded in the credit report and the automated underwriting systems will pick them up, but there can be some misses there.

So that’s big picture, high level overview but again, Jeb, you and I did two full episodes on credit and what you can do to boost it, improve it, what lenders are looking for in terms of minimum scores for different programs, all that fun stuff. So if you’re interested to go back and check those episodes out.

[00:26:22] Jeb Smith, Huntington Beach California Realtor: Yeah, and those were deep dives into the credit model. Things that you can do to manipulate, I use air quotes when I say that, your credit score help increase your buying power, if you will. So yeah, if you’re interested in getting more buying power, potentially getting better terms on your loan, go check those out.

But that brings us into the fourth C Josh, which is gonna be collateral, and that’s gonna include things like the title reports. It’s gonna include things like the appraisal and we can potentially see issues in these things even though they’re third party generated pieces of the file. They can have hiccups and the underwriters gotta be there to make sure that they’re accurate. 

So what are they looking at when it comes to those? 

[00:27:02] Josh Lewis, California Mortgage Broker: So your appraisal report, the easy button, like with the credit report where you can just go and look at the score and go, okay, we’re good. Well, on the second page of the report, it tells us what the value is and we go did it match our sale price or did it match the estimated value? So we’re okay with our refinance? So cool, yay! We’re good there. And then there’s a little box that says “as is” or “subject to”. 

As is means the property is fine as is. No issues noted. It could say subject to, and it could be subject to any number of repairs. It could have an unstrapped water heater. It could have what appears to be a leaking roof that is worn out. So any number of things that the appraiser could be concerned about. Any number of things, like we’ve seen all sorts of crazy things.

We’ve seen a termite infested pergola over the back patio and you know, you can either fix it, you can tear it down. I’ve never, in recent memory, I will say in 27 years, I’m certain there’s been a time when an appraiser has called a condition out that the seller was unwilling to cooperate and work with.

But for the most part, someone will go out and remediate the situation and the appraiser goes back out, reinspects and notes that it’s corrected. So that’s the easy stuff. Is the value there and are there any repairs or corrections needed? 

The more important part, the underwriter is gonna go through and look at all the comparables and they’re gonna say, did we use the best comparables. Are there any that we skipped, overlooked, missed? Why did we not use those? They may ask for a comment, “Hey, this looks like a more valid comp. Why did you exclude that one?” 

They’re gonna go through line by line. Now, Jeb, it’s not like when you buy a silver Camry. We can go look at three other silver Camrys with the exact option packages and know what they sold for.

Houses aren’t like that. When houses are 40, 50, 60 years old people have added on, people have upgraded, people have deferred maintenance. So they have to go through and adjust for everything. Hey, this house had a pool. We gotta take $30,000 off of it to match your home that does not have a pool. This one had a fireplace. This one had a three car garage. 

So the underwriter’s gonna go through and make sure that all of the adjustments appear to be in line. And one of the things Jeb that’s interesting, we talk about desktop underwriter or automated underwriting systems. We’re going on about 10 years now of collateral underwriter where we have to get the reports. We used to just get a PDF of the reports. 

I can tell you how old I am, Jeb. When I first started, we would have an overnight package with a 20 page appraisal with Kodak printed photos glued to them. So we’ve gone from that back in the day to a report now that is an XML format that collateral underwriter sucks all that data in, and it is comparing it against all other appraisals they have in their system and giving it a score.

If it comes out and says, “Hey, fantastic!” The underwriter’s not gonna look at it super closely if it comes out and says “this is an iffy value, we need you to look at it closer.” They’re going to dig in it more thoroughly. Doesn’t mean that a low collateral underwriter score is gonna prevent your [00:30:00] appraisal from being approved, it just means it’s gonna get looked at a lot more closely.

And it could mean you’re a custom home, a high-end area where there’s not a lot of comps, not a lot of similar homes. Could be rural. Any number of things can trigger that from happening, but that will determine how closely your underwriter is digging in and looking at that appraisal. So in this instance, they’re not necessarily checking your loan officer’s work, they’re checking the appraiser’s work.

[00:30:23] Jeb Smith, Huntington Beach California Realtor: And then that takes you into the title report. Right? So title report. What is the title report? In the simplest definition. 

[00:30:30] Josh Lewis, California Mortgage Broker: It’s giving you a legal description of the property so we make sure we’re all talking about the same property here, and it’s giving us a list of the title history, making sure there’s no clouds to title, there’s no one else that has unreconveyed deed against that property saying they have some level of claim against it and they’re also showing any easements that may be on the property.

Maybe a utility easement that says, “Hey, Southern California Edison gets to run their power lines across the back of the property.” It may be that your neighbor has a recorded easement that says they get to drive across the front 10 feet of your property to access their property so that it’s not landlocked. 

So the underwriter is going through there and saying, is there anything in here that would prevent us from doing the loan? And what do we know about this property that has to be cleared? So a super simple example, Jeb, is if I buy your house, your house has a mortgage on it.

That title report’s gonna say, Jeb has a mortgage for X dollars with X Bank, and there’s gonna be a condition on my loan approval to say, this lien has to be paid off in full and that is going to be insured by the title company. The lender is going to get lenders title insurance guaranteeing them that that was what happened.

So that’s where escrow and title and that closing role comes together. But for the most part, that’s what we’re looking for. And title rarely becomes a problem, but when it is a problem, it can be one of the bigger problems. 

[00:31:50] Jeb Smith, Huntington Beach California Realtor: What I will say is when you’re working with a good title company, your title officer, when you’ve got somebody experience on the other side, they’re coming with you when you get that title report saying, “Hey, listen, these things are on the title report. This is what we need to clear it up.”

They’re already working on it prior to the underwriter ever having to get to that point. So when the underwriter gets the title report and the transactions moving along, you know, all these things can be satisfied, it shouldn’t be an issue because there should already be a resolution kind of working in the background.

But again, the underwriters there to dot the i’s, cross the t’s across the entire file. So they have a lot going on there and people often ask, ” my loan goes to you, Josh, you start the processing, it goes to the lender. Why does it take three, four days, in some cases, maybe a week if you have a crazy file to get an answer back from the lender saying, Hey, is my file approved? 

It’s because they’re doing all of these things. Imagine a file that has tough income calculations, has some issues with the credit, there’s things going on with the appraisal or the title report. There’s hurdles and things that need to be jumped through in order to get to that resolution. Because that person, their job’s on the line, right? When they make a decision and they stamp this thing as an approved file, if you will.

There’s a lot riding on that, and they can’t afford to be wrong, so they just wanna make sure that they’re doing it correctly. Right? And so that’s just part of the process. 

[00:33:13] Josh Lewis, California Mortgage Broker: In terms of a loan, how long does it take to underwrite a file? The borrower that I told you about earlier, she has no debt, 800 credit scores, salaried income, been on that job three, four years. Simple, straightforward house. The appraisal, actually, we got an appraisal waiver because she’s so well qualified. I looked at it yesterday. The prelim is clean. That’s probably a one hour underwrite. The underwriters going through and just checking boxes and going, Hey, cool.

Now let’s say I have another file that both borrowers are self-employed. Husband has multiple companies. We’ve got multiple tax returns that all have to be analyzed. Lots of debt, multiple bank accounts. They’re still well qualified, but that could be a 4, 5, 6 hour underwrite. 

So you say, “Cool Josh. You just told me a hard one is six hours. Why can’t I have my loan approval tomorrow?”

At any given time, there’s a queue depending on overall volume, if you go back in the middle of 2020, the world shut down for covid rates dropped to the floor. Literally 60% of homeowners are refinancing at one time, we had lenders that were three, four weeks to get your file through underwriting.

It’s not that your file is complex or takes that much time, it’s just there’s that many to underwrite. And right now you guys have probably seen with loan volume down, it’s not like we have underwriters sitting around waiting to underwrite files because lenders cut staff and keep their capacity. 

So In general, most of our lenders are at one to two days. If I submit a file this morning, I’m not most likely gonna get it back this afternoon. Although some of our lenders will do that. Probably gonna have your approval Monday afternoon, Tuesday morning, something like that. And it’s kind of important. Jeb, we talked about who the underwriter is, what they’re doing, but let’s talk about the timeline and what happens.

When they approve your loan it doesn’t mean, hey, cool, we get to go to loan docs. That’s your conditional approval. It says, I’m approving the loan, but I need A, B, C, and [00:35:00] D. And there’s usually eight or 10 things on there. And for you as the borrower, 5, 6, 7 of them don’t concern you. It’s something we need to do with title on the backend, an update, a change to the appraisal.

We may need an updated pay stub from you. So some of us boiler plate and basic, but Jeb, the big one that we always get. Why don’t you walk through what a conditional approval means and how that ties into releasing your loan contingency. 

Well, we’ve actually talked about it before. I mean, We’ve done full podcast on that topic but you know what happens when you get the conditional loan approval? It’s coming from the lender. It essentially means your loan’s approved. At that point, you can release contingencies on that file assuming there’s no conditions on there that your mortgage professional can’t answer to. 

So what happens is you get approved for a loan, oftentimes as your real estate agent, I’m in touch with your lender. In fact, all the time I am. I’m saying, “Hey, do we have loan approval?” 


“How, what are the conditions? Are you confident that we can get those conditions satisfied?” 


“Okay. Are we good to release contingencies?”


We release contingencies. In some cases the answer is no. There’s something that popped up here. I don’t know if we can satisfy this or not, because there’s a change here, something that we weren’t aware of, that they didn’t tell us about or whatever. And then we’re in this situation where, We have conditional loan approval, but we probably need at least that one condition satisfied before we’re in a position to release those contingencies.

All the more importance to make sure, again, that you have that professional on the mortgage side that understands this stuff. Somebody with experience. Doesn’t have to be Josh with 25 years of experience, but it shouldn’t be the guy that got his NML S license three months ago. Right? 

Because a lot of this stuff takes time to work through, to understand. Its years and years of experience, of knowing what the underwriter is gonna wanna see, and knowing how to get the answers for people when the time comes and especially when it comes to releasing those contingencies.

So I realized we went over a lot today in talking about the underwriting process, but as Josh said, this is an overview, right? There’s a lot of things here that could be really dove into in a much deeper capacity. And over time we will do some of those episodes and really take you down that rabbit hole.

So if there’s something you guys want to know more about, reach out to us. We’re happy to have that conversation and really happy to provide that information to you because at the end of the day, we want you to become The Educated Homebuyer. So hopefully provided a little bit of value for you today and we really enjoy you guys being here.

We appreciate the support. Until then, Adios!

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