Many factors play into the successful closing of a mortgage. However, sometimes things happen and the mortgage becomes suspended. This can be frustrating and confusing to those going through the mortgage process. Recently, I sat down with Mike Lyon, vice president of operations at Quicken Loans, to get more insight on the common reasons why loans get suspended and how to set the right expectations for clients during the mortgage process. In part one of this interview series, we will focus on suspension and how to avoid it.
Q: What Does It Mean When a Loan Is Suspended?
ML: It means that the loan is broken. If you look at it from an automobile assembly line standpoint, that automobile has been yanked off of the assembly line because it has a defective part or parts.
A great example of that is income. Clients will work with their bankers and calculate their monthly income. Say it’s $5,000 a month. Then you have a debt ratio that is based off of that. The debt ratio has to be under a certain level in order for us to actually do the loan. We pull tax transcripts on that client and we find out, lo and behold, there is unreimbursed business expenses that the client forgot about because they’re working for a company and writing off the cost of their uniforms that they have to wear on the job. They write it off for say, $10,000 for the year and we have to back that off of their monthly income. Suddenly, their income is lower than we thought it was. The debt ratio then goes over what was allowed by the product they originally qualified for and that loan is now suspended. So the loan would come off the assembly line, and hopefully we can repair it. We have our own little repair shop of solution consultants and analysts to try to get the loan back on track.
Q: From an Operations Standpoint, What Are the Most Common Reasons that Loans Do Not Close or Get Suspended?
ML: The great news is that, at the initial underwrite, 90% of the loans that come in are conditionally approved. This means that they are not suspended; they still work. We’re talking about one out of every 10 could have something wrong with it at the very beginning.
The reason for suspense could be income, short assets, or some kind of credit history issue – but the number one reason upfront is income. People forget, for example, that they work for one place but have a partnership on the side with a Schedule E or Schedule C business that happened to lose $15,000 last year. We have to, unfortunately, exclude that or reduce their income because of that loss.
From a total process standpoint, as that loan goes through the pipeline, the number one reason for suspense, without question, is collateral. It dwarfs every other reason. Simply put, many clients think that their home is worth more than others in their neighborhood. They think, “I know that my neighbor’s home just sold for $200,000 and my other neighbor’s home sold for $200,000. But they don’t have fancy new yellow linoleum in their basement bathroom. My home is obviously worth $50,000 more so I’m going to estimate my home at $250,000.” We get the appraisal back and it says the home is worth $200,000. This is because the value of the home is only as much as what recent sales in the area have shown. It’s always based on the comparable properties in the area and what they’ve sold for. When clients overestimate the value of their home, loans end up being suspended because their loan-to-value has now exceeded what is allowed according to product guidelines.
If we say we need $10,000 of assets to close and we get your bank statement and find you have $10,000 in assets but you also have a $9,000 deposit which came from silver doubloons buried in your back yard, we’ll have an issue. We can get a great explanation letter on the silver doubloons but we can’t use those assets because they are not documentable funds. We can never use those. We have to have funds that are actually showing up on a bank statement for 30 days. We have to have seasoned funds.
Q: What Missing or Incorrect Documents Commonly Delay a Loan’s Closing or Cause Suspension?
ML: These types of things may not cause suspension, but they do slow the loan down. It’s important to step all the way back to the beginning of the process. The first step in having a successful loan is having a client who has correct expectations upfront and understands that we’re going to be asking for a ton of documentation. This is especially important for those clients who refinanced a few years ago when guidelines were less stringent. Maybe they refinanced in 2007 and figure, “Well my last loan was really simple, this loan is probably going to be the same.” This, however, is a brave new world. We have to document the heck out of our loans, so you may have to provide documentation now that you did not have to the last time you refinanced.
Along with the correct expectations upfront, getting the information we need is critical. The client has to give us a homeowners insurance declaration page. It’s amazing how much not having this page from the insurance company slows the process down.
Bank statements are another one. When we ask for a bank statement, which includes all pages front and back, we mean an official bank statement. A lot of times, what we get is the Internet printout, which is not a bank statement. It’s these shortcuts of documentation that a client may take that can disrupt efficiency.
Another thing that can go awry, mostly happening upfront, is credit. A client that has a disputed account on their credit report, needs to understand that their credit score doesn’t account for that dispute. Let’s say you had an account that is 90 days delinquent and you dispute that account. Your credit score could magically go from a 640 up to a 730 overnight because that account is disputed, and by law the credit bureaus can’t include that in the credit score. So while you’ve increased your credit score, we’ll say we need an explanation and proof of why you’re disputing that account. There have been times when clients would actually say that they just wanted a higher credit score. Those usually go from suspense to denied in a hurry. It’s not helpful at all.
Property is another one. When you estimate the value of your home, your mortgage banker is going to tell you that you’ll need an appraisal. You need to treat that as if your mother-in-law and mother are showing up on the same day to go through your house with a fine-toothed comb. The appraiser is coming inside and they’re going to check things out. It’s amazing the number of times that we were going to lend on somebody’s home, and the appraiser has a hard time just walking through a room because it’s filled with so much stuff. Or there are ceiling tiles missing. Or the home is in bad shape. If you do a good job of cleaning your home prior to the appraisal, you probably add 5% to your home’s value. It’s as simple as that. If you haven’t dusted the home in five months, it’s time to dust. Make a good impression as if you were trying to sell your home. If you have potential buyers coming into your home, you want to make it as appealing as possible. During a refinance, your home is collateral, so you’re basically “selling” your home to the company who actually wants to lend you the money. To get that loan, you have to be credit worthy and your collateral has to have the value that is necessary. One cannot offset the other. If I have a great client but poor collateral, I can’t do the loan. The same applies if there is great collateral but poor credit, I still can’t do the loan. Both have to pan out so the process moves along smoothly.
Well, there you have it straight from one of the top dogs at Quicken Loans. Keep a lookout for part two where Mike will be discussing other difficulties that may arise during the mortgage process and how you can avoid them.
Mike Lyon is the vice president of operations at Quicken Loans. Mike has been with Quicken Loans since 1997 and has been in his current role since 2002. In his position he is responsible for all underwriting, processing, closing, and vendor management activities and leads a team of approximately 2500 team members. Prior to coming to Quicken Loans, Mike was a National Bank Examiner and worked for the Comptroller of the Currency, a division of the Department of Treasury, from 1987 to 1997. Mike holds a Bachelor of Business Administration from Eastern Michigan University.