Mortgage Financing 101

Let me outline a situation that happens all too often in the loan process; the customer has been pre-approved, the titlework is done, the appraisal has come in above the purchase price, everyone is just waiting on final approval and closing instructions. Then, out of the blue there are problems. The insurance is higher than the loan officer initially estimated in the loan application. So what? Here is why this can be a potentially huge problem;

The loan officer can only make a somewhat educated guess as to how much the insurance premium will be.
The debt to income ratio is affected by the insurance premium and if the premium comes in higher, the underwriting decision is invalidated and has to be re-run.
For loans underwritten to conform to Fannie Mae/Freddie Mac guidelines, debt ratio can be a huge issue; sometimes causing an otherwise clean deal to be either turned down or put in a different pricing tier-higher rates/larger down payment.

While it is true that the insurance premium is derived in a large part from the property itself, an equally important factor in deriving premium is the individual borrower’s insurance score. In other words, I’ll pay a different rate than you will to insure the same exact property for the same exact amount of coverage. Why? My consumer history is different from yours. My credit history is different from yours and my claims history is different from yours.

What’s the point?

The point is, until the loan officer or realtor or the customer gives an insurance agent the exact customer specific and property specific information, the premium the loan officer used to get the pre-approval is a guess. Which means the debt ratio is a guess, which means the pre-approval could be meaningless.

As a loan officer, I could take a customer’s information, input it, pull credit and generate an automated Fannie Mae/Freddie Mac underwriting decision in minutes. This almost always has to happen first, because realtors and sellers usually will not take an offer seriously until they know a customer has been pre-approved for the loan. The pre-approval process is done by the loan officer, not by an insurance agent, so there is simply no way for the LO to know the true premium. Most LO’s will overestimate the premium to protect against premium swings. A truly experienced LO will ask permission to get an insurance quote as well, or instruct the borrower to obtain one BEFORE issuing a mortgage pre-approval letter and BEFORE the deal goes to contra