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In the mid 1990?s, the mortgage industry saw the credit score and its predictive power to assess a borrower?s ability to repay a mortgage step into the limelight as one of the most indicative factors for loan approval. After conducting statistical test after statistical test, Fannie, Freddie and Ginnie, the 3 big lending institutions, mandated that the credit score should be used in conjunction with manual underwriting to assess loan approval. Not too long after, automated underwriting systems (AUS) were developed that expedited and streamlined the underwriting process even further for lenders. A loan officer today simply inputs a borrower?s key information into the preferred underwriting automatic engine, such as his/her credit score, income, amount being borrowed, cash reserves, employment and housing history, and the value of the property. A response is returned by the underwriting engine recommending approval or denial for the loan.

If your loan receives a denial from an AUS, the buck doesn?t necessarily stop there. Life happens to people, and oftentimes it?s going to take a real live person understanding the nuances of a file to make an underwriting decision. That?s when your lender may suggest submitting your file to underwriting for a manual review. After all, not everything in life can be automatic, right?

A perfect scenario for a manually underwritten file would be someone who has no credit scores. No credit scores? Yes, it is possible. I?ve had customers who, being old school and always having paid for everything in cash, had never established traditional credit lines that reported to credit reporting bureaus. In a case such as this one, I had to submit non-traditional lines of credit to underwriting, something a machine can?t assess. This means I had my customer bring in bills he had paid on time for the past year to create a credit history. Typical ones used are car insurance, utility bills, cell phone bills and cable bills. You can expect to have to provide 3-4 different trade lines if you haven?t established a traditional credit history and score.

?The most typical reason we see a file submitted to us for manual underwriting is for either no credit score or an error reported on a credit report,? reflects Patricia Haynes, onsite Government Underwriter at Mortgage Investors Group. ?For instance a judgement that doesn?t really belong to the borrower. Maybe it?s really Dad?s judgement reflected on the son?s report because Junior and Dad have the same name. That?s when I can overwrite an AUS decision because I have the documentation to support my decision to do so in front of me.?

Another very common reason to submit a loan for a manual underwrite is when your customer?s credit score is below 620 and gets an AUS denial. If this is the case with your loan, be prepared to provide more than average documentation about your credit history, as well as written explanations as to why your credit score has suffered recently. Maybe two years ago you had a financial meltdown due to a medical illness, but in the last twelve months, you can prove you are back on your game and have been repaying debt. However, your credit scores haven?t exactly caught up with your actions. An underwriter is going to piece together the different aspects of your file and see if it makes sense. Your home lender should be able to review your file and guide you as to what documentation an underwriter will want from you to grant you loan approval.

Naturally, if your credit score is really low and you have very little explanation for your state of credit affairs other than you failed to pay your bills on time, don?t hold your breath for loan approval. An underwriter can see through smoke and mirrors. After looking at files as long as they have, they can basically sniff out a loan that has merit from the ones that are too risky.

So, even as our world gets more and more automated every day, it?s nice to know that you can?t replace genuine common sense, even in the mortgage industry. And it?s nice to know that you can plead your case for credit worthiness to a real live human being.

Your best tool to negotiate with your mortgage company is the discovery of a Truth in Lending Act (TILA) violation, which in some cases may give you the right to rescind the loan. State and Federal laws require mortgage companies to follow specific guidelines when originating home loans and as a result many mortgage loans have TILA and/or RESPA violations which can be used as bargaining tools when negotiating a loan modification with the mortgage company.

Many of the home loans originated by brokers and lenders over the last few years have unexplainable fees and charges or were manipulated by overstating the borrowers? income or inflating the property value to allow the lender to illegally profit from the sale of mortgages to investors in the secondary market. Subprime mortgages with hidden interest rate adjustments and pre-payment penalties or Option ARM loans with minimum payment options allowed borrowers to differ interest to a point in future when the loan recasts and forces the borrower into hardship by paying a much higher mortgage payment. In most cases refinancing is not an option due to declining property values or high debt to income ratios. Only a Forensic Loan Audit can discover and document these violations, which may be used against the lender when negotiating a loan modification.

Another common violation occurs when the creditor fails to properly provide a notice of the borrower?s right to cancel. The right of rescission may be extended for up to three years in certain circumstances. When the right is extended for three years you can rescind the loan at any time before the three years are up meaning that the loan is treated as if it never existed. This means that the creditor must refund all interest paid, all closing fees, all broker fees, and even pay for your attorney fees.

The extended right of rescission is a powerful tool to help borrowers who have been victims of predatory lending. During a Forensic Mortgage Loan Audit we often discover TILA violations, which can be used as leverage when negotiating a loan modification.

This is not intended to be construed as legal advice.