One of the most important things to understand about the mortgage biz is that the agencies, FHA, VA, USDA for government loans and Fannie Mae & Freddie Mac on conventional -- establish guidelines/rules for everything to do with
underwriting a borrower, the transaction terms, and the subject property
Simply put, a loan that adheres to specific criteria can be combined with similar loans and sold in the secondary market for a profit. However, if a lender discovers that a funded loan is flawed and does not meet the required criteria, they may incur losses or face financial penalties, and in severe cases, be banned from an agency. Persistent issues with flawed loans could lead to the lender going out of business.
Given that these underwriting guidelines are constantly evolving, it can pose challenges if the loan officer and lender fail to keep abreast of these changes.
Certain lenders implement stricter underwriting rules beyond the guidelines permitted by the agencies (referred to as "overlays" in the mortgage industry). Banks and medium-sized mortgage companies tend to have overlays, unlike mortgage brokers who have access to various wholesale lenders. This, along with the expertise of loan officers, offers more flexibility in securing loan funding options.
Adding to the complexity, lenders may have varying interpretations of these rules, particularly when the guidelines from the agencies are unclear. Government loans often contain ambiguous rules, resulting in one lender being more stringent than another when assessing a loan with identical criteria.
Jumbo loans present a unique challenge, as the guidelines differ from one lender to another, often causing confusion for borrowers.
Working with an experienced and knowledgeable mortgage broker will decrease transaction fallout and make the process smoother for both the borrower and the agents.