Mortgage underwriting is the process of a lender determining that a borrower meets all requirements for final approval of their loan request. However, it is not that simple. In this post, we discuss the top obstacles mortgage underwriting services often lead to and tips on overcoming them.
Not Reporting Fully or Consistently
Documents not properly accounted for, inconsistent information, or financial records that are out of date will have an adverse effect on underwriting and the time required to obtain loan approval.
Lenders should develop a systematic documentation checklist that borrowers must strictly follow to counter this. You should also consider using automated document verification, as it reduces the opportunities for human error and shortens this process. Consistent staff education and training to recognize inconsistencies can also be helpful.
True Evaluation of Credit Risk
Evaluating the credit risk of a borrower is one of the key first steps in underwriting. But the risk profile can be hard to assess, especially among borrowers like those with wiggle room on credit scores or little information in general.
This is where alternative credit scoring models that come with wide sets of data points to consider, such as utility bill payments or rent payments etc., will be a great help for lenders. It will also help to give a more complete picture of the borrower that you are assessing. In addition, updated and accurate credit scoring criteria can also help improve the accuracy of evaluation.
Property Assessment Inconsistencies
There are also inconsistencies in property valuations, which is another hurdle mortgage underwriters face. If the property is overvalued or undervalued, then it causes underfunding and more financial risks for lenders.
Using only experienced, expert appraisers can greatly lessen the amount of variation in his meta-analysis. Moreover, to avoid the chances of human error one can also opt for technology like Automated Valuation Models (AVMs), which get a more accurate estimate by using multiple sales records from similar properties that have been sold recently within your area.
Dealing with Self-Employed Customers
One of those challenges is underwriting for self-employed borrowers whose income may prove to be inconsistent or variable. Self-employed borrowers might not have a reliable paycheck like salaried employees, and so underwriters may be forced to make inference judgments about their financial situation.
Developing a specialized methodology can help lenders evaluate self-employed borrowers by looking at their income over an extended time frame, such as two or three years rather than just one. Tax returns, business financial statements and other assets provide a much better sense of how they earn. Additionally, clearer guidance to self-employed borrowers on what paperwork is needed can streamline the process.
Wrapping Up
Mortgages are highly regulated, and underwriters must ensure they know what compliance requirements exist in order to mitigate potential risks. Miscreants can inflict costs on the federal government, exposing lenders to additional risks.
A compliance management software will automatically update based on new regulations as and when they are introduced, meaning mortgage companies do not need to worry. Regular training sessions on compliance standards for underwriters also can make sure they are updated with the latest requirements. Legal advisers can review loan documents to help vet deals and mitigate compliance risks.
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