Getting Borderline FHA Loans Approved: Become an Artist and Learn to Paint the Picture
Residential Mortgage Banking Branch Program for Professionals Guaranteed, an established and well-funded Mortgage Banker since 1992, is positioned to continue its prominence in the industry. As a leading FHA Direct Endorsed Lender, we underwrite all files in-house. This allows for faster approvals, common-sense underwriting and timely closings. We are actively seeking relationships
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with productive mortgage teams and entrepreneurial mortgage professionals.
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Federal Housing Administration (FHA) loans are “Story Loans” … and the better you are at painting the picture for the underwriter, the more FHA loans you will close. The FHA was created in 1934, on the heels of the Great Depression, in order to help Americans achieve homeownership. Given the challenges they faced at that time in history, these loans had a lot of stories to tell. Today, we certainly have no lack of such stories in the loans we work on. How many times have you had this experience: You’re speaking to a potential client; everything about the loan sounds great, and you’re already adding up your commission when they pipe up, “Oh! Did I tell you I had a bankruptcy?” or “Oh! Did I tell you that I’m on medical leave?” The fearless and experienced FHA originator, undeterred by these statements, just gets out their FHA Intuition Palette and begins to paint. As a former FHA underwriter, the Letter of Explanation, or LOX or LOE as some call them, is the single most important document in a borderline file. The LOX (what we call them here in the great state of Michigan), is the document underwriters turn to when they are undecided on a loan. And I can tell you that in my nearly 14 years of originating and teaching FHA, sad to say most LOs do not know how to help borrowers construct an effective LOX. I have developed an LOX formula that I have used myself, and taught for many years, and it works! The formula is this: Background, Struggle, Reaction, and Request. The opening of the letter should give the background, the material facts and events that led up to the bankruptcy, such as the judgment, the repossession, etc. Be sure to frame the situation clearly for the underwriter. The body of the letter should convey the client’s struggle and their reaction; that is, what they had to go through in dealing with the chal-
lenge and how they reacted. This section is most critical and should contain what I call the “emotional hook;” that is, the life event that would make any compassionate human being feel sympathetic toward the person for what they experienced. It’s the challenge in your client’s life that makes the underwriter say, “Wow, they went through a lot.” If the letter you construct with your client can evoke this response in the underwriter, you’ve accomplished your goal. The closing should include a request to approve their loan and give them a chance. This is “where it’s at” with borderline FHA deals and is the reason that the FHA was created: To hear people’s struggles, stories and triumphs and to offer them the opportunity of homeownership. Now, your clients won’t always have a compelling reason why they had problems with their credit, and often, the more borderline the deal, the less compelling reason they had for the mishap. Hence, the less likely the loan will be approved. Of course, that works in the other direction as well: The more borderline the deal and the more compelling the circumstances, the more likely the deal will get approved. Now for an example of a well-constructed LOX: Dear underwriter:
(Background) My name is Derrick Johnson, and I wish to explain to you why I had a string of 30day late payments on my mortgage and credit cards nearly two years ago. I was at work and sustained an injury to my arm that put me out of work for nearly six months. It was during this time that I fell behind on my bills, since I was not able to work. Before and after this time, as you can see from my credit report, I have a good history of paying my bills on time.
(Struggle) I suffered a lot of pain during this time, and in addition to being out of work, it continued on page 17