Thursday, November 20, 2008

What Is an Underwriting Exception?

Q: When a mortgage broker says they are trying to "get an exception" from an underwriter, what does that mean?

A: Underwriters follow underwriting guidelines to determine whether a loan application falls within the risk parameters for a particular loan program. If a loan is not approved because it does not meet all of the guidelines (debt-to-income ratio is too high, reserves - or money in the bank - are too low, the borrower has not been self-employed for long enough, etc.), then the underwriter can still approve the loan if there are "compensating factors". Compensating factors are things that reduce the risk level of the loan. Some examples would be very high credit scores, very low debt-to-income ratios, etc. If the underwriter thinks there are sufficient compensating factors, they may issue an "exception" to the guidelines and approve the loan, even though it does not meet all of the underwriting guidelines.

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