Underwriting Process and Qualified Mortgages

Underwriting Process

• Underwriting evaluates loan application risk, leading to a lending decision.
• Underwriters analyze the "4 C's": Capacity, Credit, Capital, and Collateral.
• Beyond the "4 C's", the ATR/QM rule mandates assessing a borrower's ability to repay.
• Eight factors determine repaying ability: current income, expected income, employment, monthly payments, cumulative loan payments, debts, debt-to-income ratio, residual income, credit history, and loan-related items' monthly payments.
• The lender must verify loan Qualified Mortgage (QM) status.

Qualified Mortgages (QMs)

• QM loans meet lower risk criteria under the Ability to Repay/Qualified Mortgage (ATR/QM) rule.

• Conventional and government loans can be QMs.

• QMs are eligible for sale to Government Sponsored Enterprises (GSEs) or inclusion in GSE- or Ginnie Mae-guaranteed securities.

• Loan revisions effective 2022 categorize QMs as:

  • Small Creditor: Small depository institutions with limited annual origination volume, have different APR and loan term limits. Balloon QMs can only be from small creditors.
  • General: Relevant to most lenders, these QMs:
    • Determine repayment ability via fully amortizing schedules with a max rate for the first 5 years.
    • Exclude negative amortization, interest-only, and balloon features, and terms over 30 years.
    • Cap fees based on loan amount, adjusted annually.
      Include fees in APR calculation, PMI exceeding FHA premium, mortgage broker compensation, lender charges or affiliate charges. Exclude third-party charges, government mortgage insurance premium, PMI equal to government insurance, reasonable real estate fees not paid to the lender/affiliates, up to two bona fide interest rate reduction points, and fees not exceeding $3,445 on loans between $68,908 and $114,847.
    • Maintain APRs below thresholds.
      • Safe Harbor QM (Conclusive): APR exceeds APOR for a comparable transaction by less than 1.5% at time of interest setting. If interest may change in first 5 years, maximum possible rate within the first 5 years is used for APOR calculation.
      • Rebuttable Presumption QM: APR exceeds APOR with a difference between 1.5%-2.25%, meeting all other requirements.
    • Subordinate liens have stricter APR thresholds.

• Assets, income, and debt verification are required, meeting the standards of agencies like FHA, VA, or USDA.

Secondary Market and Compliance

• Underwriters must adhere to the underwriting guidelines of secondary market purchasers (Fannie Mae, Freddie Mac) and insurers (FHA, VA, USDA), ensuring secondary market marketability and ATR/QM compliance. This includes ensuring AUS (Automated Underwriting System) findings are addressed.
• Verification of income, employment, assets, and liabilities must be to these agency standards.

Application Response

• Within 30 days, lenders must respond to loan applications.

• Denial: A Statement of Denial (Notice of Adverse Action) should be issued.

• Approval: Can be:

  • Conditional: Requires further verification.
  • Final: May have non-critical conditions.
  • Counteroffer: Suggests other approval options (e.g., different down payment, government loan).

• Lenders must respond to applications as received and are not required to provide counteroffers.

This quiz covers the fundamentals of the underwriting process, emphasizing the analysis of loan applications and risk assessment through the 4 C's: Capacity, Credit, Capital, and Collateral. It also delves into the criteria for qualifying as a Qualified Mortgage (QM) under the ATR/QM rules, including recent updates on QM categorization. Test your knowledge about lending decisions and borrower qualifications!