The Dangers & Pitfalls of Online Lending

Dear Friends – We’ve all seen and heard the cute advertisements for the so called, “digital mortgages” or “space ship mortgage” as a magic way to get a snappy mortgage approval at the push of a button.  Although, these may be effective marketing campaigns, the truth is…. Mortgage “Commitments” REALLY don’t work that way.  The reason is ….  like anything of value, there is much more work behind the scenes to achieve our goal; and unfortunately, as of March 2017, obtaining a “Mortgage Approval ‘Commitment” remains to be one of those things.  Simply entering your name, social security number, and few other bits of your personal information into some lender’s website does not guarantee that you will ultimately receive a mortgage commitment.  Far from it.

What is a Pre-Qualification?  Pre-Approval?  Mortgage Commitment?:

Until the Borrower furnishes all of their documents, and the Lender thoroughly reviews the borrower’s documents, and verifies a lot of information through 3rd party sources, an on-line pre-approval might be nothing more than techy type of “Pre-qualification” – and sometimes a dangerous one at that.  There are really 3 stages of a mortgage application process:  (1) Pre-qualification, (2) Pre-Approval, and (3) Mortgage Loan Commitment.  A pre-qualification is when a borrower furnishes a loan officer with verbal (or online input) information, and the loan officer makes a judgement on whether that borrower will be approved, and if so, for how much.  A pre-approval goes further by furnishing the lender with not only information to check credit, but also submitting documentation for review so that the lender can verify that income and assets (among other things), are accurate.   In today’s real world of mortgage lending, most Pre-Approval letters are issued by Licensed Loan Officers who have varying degrees of expertise and experience, but some large scale lenders may delegate the issuance of pre-approval letters to a more clerical type position.   Finally, a “Mortgage Commitment” is a fully documented, and fully processed file that is approved by the person whom the lender employees to make the official determination to approve the loan.  This person is known as an “underwriter,” and a “Mortgage Commitment” will usually first come as a “Conditional” Mortgage Commitment.  Once the approval conditions are satisfied, the underwriter declares the Mortgage Commitment to be “Clear-to-Close.”

Not knowing the difference from a Pre-qualification, to Pre-Approval, to Mortgage Commitment can lead to misunderstandings.  Just as misunderstandings can also result from a borrower who does not furnish accurate information or proper documentation for their online mortgage application, so to can the lender’s failure to closely review and verify the information, and request necessary, supporting documentation when needed.  It is these instances when lenders can often end up with egg on their face.  If the borrower has had their loan application in process for some reasonable amount of time, it is not an excuse for a lender to turn the tables later and say, but: “they told me their income was a higher amount ….” Or, “they never told me they were claiming business expenses… “ Or, they didn’t tell me about their down payment was coming from the cash in their safe…”  just to name a few examples.  It’s no surprise that too many times we hear… “But they were Pre-Approved!  How are they being turned down now?”  Hence, misunderstanding based on providing inaccurate information, or failure to verify information can all be pitfalls of online lending.  There is so much that can be missed when there is no dialog present.

According to Wikipedia:  “Garbage In, garbage out (GIGOin the field of computer science or information and communications technology refers to the fact that computers, since they operate by logical processes, will unquestioningly process flawed, even nonsensical, input data (‘garbage in’) and produce undesired, often nonsensical output (‘garbage’) out.”  Therefore, if a borrower is supplying information online, they can make many assumptions on how to enter the requested data, but their data entered may not comply with the lender’s underwriting guidelines.  Those assumptions can become costly if the online system results in a “pre-approval” that will not hold up after the information is verified later in the processing of the loan, or even later – as when the loan gets to the underwriter.  Conversely, we have seen cases where the online applicant did not enter information correctly that resulted in them not being approved for as much as they could have been, and for as much as they hoped to.

It should be noted that the majority of mortgage commitments these days are based on the Lender’s “AUS ACCEPT or ELIGIBLE findings.”  The acronym “AUS” means the Lender’s “Automated Underwriting System.”  The AUS is a “computer-generated loan underwriting decision.  “Using completed loan application information, an automated underwriting system retrieves relevant data, such a borrower’s credit history, and arrives at a logic-based loan decision (ie., approval or denial, or refer to manual underwriting).  Some inputs – such as income and assets, etc., must be verified at a later date.”  ~ Investopedia.   Many problems can arise at the “at a later date part.”  An online borrower can finish the online application from their PC (or phone) and immediately receive a AUS ACCEPT/ELIGILBE.  The questions then become:  (1) when is this borrower going to furnish all of his/her documents online to the lender, and (2) when are all of the documents going to be reviewed, verified, etc?  One further note on Automated Underwriting, while Priority Mortgage does both AUS ACCEPT ELIGIBLE approvals, and “REFER” approvals, most all loans stand a much higher probability of being approved with all lenders as “AUS ACCEPT/ELIGIBLE” Loans.

For the purposes of this blog, here are just a few ways that a pre-approval can head south later based on information submitted by an online borrower who is not trained to take their own mortgage application:

  • Is the Buyer correctly inputting their Employment & Income Accurately?  The Lender will have strict rules on how different types of income are used for anything that is not derived from a salary, or an consistent hourly paid work week.  The average online borrower will usually not know how a lender calculates income sources such as:  overtime, bonus income, commission income, self-employed income, how to deduct for business expenses, and so on.  From my experience, a borrower will often honestly believe or state these forms of income at a figure higher than what the Lender may use.
  • Is the Buyer correctly inputting their Assets?  Are the assets that the borrower is indicating going to be from borrowed sources?  The online borrower may not know that matters?  Are the funds “saved” or to be “gifted?”  Although, a borrower might not make a distinction between saved and borrowed funds, in some cases when a borrower has a limited credit history, the AUS response will depend on whether the funds are saved or gifted.  Most of us in the industry know that “cash money” cannot be used as assets for down payment, but this is another example of what could trip up a borrower trying to fill out their own online loan application.
  • Is the Buyer correctly stating their debts?  Student loans are a big one…. In most cases, a lender will need to factor 1% of the outstanding balance of a deferred student loan as a debt into the buyer’s debt ratio.  Many borrower’s with deferred student loans will not consider their student loans as a debt until they become due, but a mortgage lender will.  Likewise, a lender will also factor 1% of the outstanding balance for many student loans that are set up on an income based repayment plan.    Is the Buyer living rent free, or are they renting?  As with documenting savings, if a lender can “verify” rent, it can sometimes allow for a favorable AUS response for a borrower with a limited credit history, where someone without a rental history may not get a favorable AUS response.  If the borrower is indeed renting, and states online that they are renting for “x” per month, but that rent cannot be verified, then again… there can be problems later if the initial AUS findings were based on information that cannot be verified.  As far as borrower’s that own additional properties, there are all different implications that can come into how debts are treated, and just because the online applicant may believe that they are breaking even, or have a small positive cash flow on rental property, doesn’t mean the lender will calculate it that way.  Many more examples can be given…

hese online approval systems don’t eliminate the need for any of the “follow up” paper work on line to the lender.  Does anyone really believe that an online lender will furnish a “Mortgage Commitment” without requiring such things as paystubs, or documenting sufficient funds to close, as well as other types of documentation?  So then, when a Lender can be easily reached at your convenience, what is the value of these internet sites?  Perhaps they are lead generation systems for the lenders who have implemented them?  If that’s okay with prospective borrower, then great.  However, the borrower who has went online to get pre-approval information may not wish to be continually marketed by some lender that is not local, and that they weren’t referred to.  Especially if they have no knowledge of that online lender’s service, rates, and costs (other than what the tv, billboard, and radioadvertisements “claim.)”  This is why a Borrower will still benefit from the referral of a Local, and trusted Loan Officer from their Realtor, or friends, or family members.  For a local Loan Officer to survive, and stay in business, they must be accountable to their local market.  They must be accountable to the people they have done business with in the past, and hope to continue doing business with in the future.

Getting a Pre-Approval On-Line could be compared as getting your home’s market value from Zillow….  Isn’t it just easier to make a phone call and spend 15 minutes with an experienced Loan Officer who knows how to ask all the questions, who knows how to go directly to the issues that need be addressed, and in the end save you time, money, and aggravation?  The online stuff can be okay to seek general information, but for those who are serious about Buying a home, Selling a home, or financing a home, they could benefit from the assistance from Local professionals.  At Priority Mortgage, you’re not a number in some mega lender’s assembly line, your mortgage is our Priority!  We’re here to have real dialog with the customers who are referred to us.  We are here to explain loan options available to you.  We explain in detail by way of example on the official “Loan Estimates (LE)” form as required by Dodd/Frank.  Accordingly, we review and discuss with you how the down payment, the monthly payment, the closing costs, and escrows may vary depending on sales price, area of purchase, and loan type.  We are here for your from start to finish, and all the way throughout your Home Buying process.  Just as your Realtor is available:  work days, evening and weekends, so are we.  We are here to help in many ways that cannot even come close to be matched with online lending.

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