Reader Question: Do underwriting guidelines vary between lenders?

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I recently received this email from a Mortgage Porter subscriber:

Do different banks need different underwriting documents? I am talking to two lenders now, and one will give me a lower rate but asks for the bank statement from my family which wires me money; the other one has a higher rate but only needs a gift letter. Is it because some banks are more strict because of their lower rate? Thanks.

The simple answer is: yes.

Different banks and lenders may have different underwriting guidelines. This is often referred to as an underwriting “overlay”. Fannie Mae, Freddie Mac, FHA, VA and USDA all have their own underwriting guidelines that need to be followed when a lender is originating a mortgage for any of these programs.

In addition to the basic underwriting guidelines, banks or lenders may layer more guidelines or requirements on top of those issued by the Fannie/Freddie (conforming), FHA, VA or USDA. The overlays could be as simple as a minimum credit score requirement that’s higher than what would be required with the basic guidelines. Some homeowners wanting to refinance utilizing the HARP program have probably experienced this if they have existing pmi – some lenders will accept this some won’t.

Not to mention, there is a human underwriter who will review your loan and who may require additional documentation. The guidelines are subject to the underwriters interpretation as well and how they view your loan application.

With the readers question, there are other potential issues besides underwriting overlays. 

It’s quite possible that the mortgage originator who seems to have the easier underwriting guidelines may either not be fully aware of their underwriting guidelines and could be just trying to land this borrowers loan. The reader may discover after his loan has been submitted to underwriting, that he may still need to provide a bank statement in addition to the gift letter.

The interest rate difference may have nothing to do with the difference in guidelines. However “back in the day” of reduced doc loans, interest rates tend to be higher based on the risk involved for the lender.

My suggestion for the reader is ask the lender who’s says they will only need to accept the gift letter if they can confirm that with their underwriter. Do the mortgage originators have direct access to the underwriters? And I’d have the borrower prepare to provide bank statements along with documentation for large deposits (this is a pretty standard guideline). If you find that you’re not getting the answer you’re looking for, as the lender if the guideline is Fannie/Freddie (etc) or an “overlay” from the bank/lender. If it’s an overlay, you might be able to find another lender without the overlay.

As a correspondent lender, Mortgage Master Service Corporation has in-house underwriters on location at our main office in Kent. This allows me great access to review scenarios by them if I have a situation where I’m not certain of the guidelines. As a correspondent lender, our loans are sold after closing (after funding) to the investor or lender and we do have to follow their underwriting guidelines. We work with several lenders and their guidelines (underwriting overlays) may vary.

If you’re interested in a mortgage to buy or refinance your home located anywhere in Washington state, I’m happy to help you.

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