Written By: Glenn Michaels, Op-Ed Writer
When underwriting FHA loans HUD reserves the rights to audit each and every loan file. If HUD believes that the underwriting of a loan file was not performed in accordance to their guidelines or if they see a material misrepresentation in a loan file they can and will require your company to indemnify against loss for that particular loan file. When HUD requests your company to indemnify against loss they are telling your company that they are no longer insuring the loan and your company will be responsible for any losses in the event that there is a default on the loan. You, the underwriter and the lender can dispute and attempt to have HUD reverse their findings, if possible.
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One of the most common errors is how a mortgage lender handles a mortgage loan file with a gift situation in the loan file. Some lenders are in a hurry to close the transaction without the proper back up when there is a gift present. A proper way to handle this is to make sure that there is a gift letter (affidavit) completely filled out, proof of the donor and its relationship, evidence of the donor’s ability to give the gift and proof of the transfer from the donor’s account into the borrower’s account prior to closing. If this is going to be done at closing then we need to see the funds transfer shown on the HUD – 1, Settlement Statement.
It is not uncommon to underwrite and to approve a loan file with housing and debt to income ratios in excess of the ratio guidelines. Whenever an underwriter does this they should list the compensating factors to do so. In addition an underwriter should give their reason for approving the mortgage loan file. Loans that do default in the future and there are no compensating factors listed are often requested to indemnify against loss.
Income calculation errors by the underwriter where the housing to income or debt to income now are excessive without justification for the loan approval after the error(s) were discovered. A good way to protect yourself is to give your justification on every loan that you underwrite in the remarks section of the HUD – 92900LT or by an addendum.
Review as many HUD -1, Settlement Statements as possible before everyone leaves the closing table. If by chance there are non – allowable closing fees on a HUD – 1, Settlement Statement or if the cash back to a borrower is excessive and the borrower defaults you will have an indemnification. It takes 5 – 10 minutes to check the HUD – 1, Settlement Statement to avoid future indemnifications. Remember on a HUD – 1, Settlement Statements the discount cannot exceed two percent (2%), there cannot be a tax service fee of any kind and no broker fee. When reviewing a no cash out transaction, the funds going back to the borrower due to adjustments at the closing cannot exceed $500.00. If by chance a loan’s HUD – 1, Settlement Statement indicates that more than $500.00 is going back to the borrower it is considered cash out transaction and cash out rules apply.
When reviewing the borrower’s employment history make sure you can document at least two (2) years of employment unless the borrower(s) were in school or the military. The documentation is often incomplete or incorrect to back up the school or the military. If a person was in school obtain a transcript from their school, not the diploma. People who were in the military obtain a copy of their DD – 214 form. The other exception is when an applicant has or is returning to work after raising a child. Make sure you have proof that the borrower worked somewhere for two (2) or more years, a gap letter of explanation, and proof that they are on the new job for at least six (6) months.
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The reasons for indemnifying is very large, I have picked out the most common ones that could cause an indemnification.
About The Author
Glenn Michaels - As an op-ed writer, Glenn Michaels is a mortgage underwriting instructor for CampusUnderwriter (www.MortgageUnderwriter.org). As a BBA & FHA DE Underwriter, Glenn is a Pace University graduate who also graduated from New York University’s School of Mortgage Finance. Glenn has conducted numerous training classes and has worked in the mortgage banking industry for 38 years.
