In-House Underwriting vs. Big Bank Underwriting

What’s the difference between in-house underwriting and big bank underwriting?

This is a question that comes up a lot when looking for finance options in smaller areas opposed to purchasing in the big cities. The difference all comes down to the appraisal during the underwriting process. If you are purchasing a property in a small town, larger bank underwriters do not comprehend why an appraiser used certain comparable sales while reviewing an appraisal on a property located in a smaller area. Banks with in-house underwriters will look at these appraisals differently because their underwriters know and understand the area better.

What do underwriters look for in an appraisal?

Here are some of the main items in an appraisal that underwriters look at when reviewing the comparable sales used in an appraisal:

(1) Are there at least 3 comparable sales

(2) Are the 3 sales located in the same neighborhood (in town properties)

(3) Are the 3 sales more than 5 miles away (country properties)

(4) Have the 3 sales sold within the past 6 months

Big bank underwriters may not be as familiar with the area as in-house underwriters

Obviously anyone who is from a small town or lived in a small town knows that a neighborhood across town from the neighborhood the subject property is located in isn’t necessarily all the way across town when your population is 10,000 or less, it’s actually just right down the street in most cases. A larger bank would consider a comparable home across town not in the same type neighborhood and either tell the appraiser he will need to use homes nearer to the subject property, which may not be comparable at all and cause the appraisal to come in significantly under its actual value or simply say they will not finance the home because it is considered a “unique property”. Since to them it looks like there are no comparable homes close enough to justify loaning on the property. A lot of times these “big bank” underwriters may not even live in the state or most likely ever been to small towns in that type area that are not located closer to large cities and do not understand why the home down the street hasn’t sold within the past 6 months. Again, we live in a small area and it is rare to have 3 comparable sales right down the street that have sold in the past 6 months. They do not have this problem with appraisals in larger cities, because one neighborhood in a big city is sometimes larger than the entire size of the small town where the subject is located and next to always will have at least 3 comparable sales to use that have sold within the past 6 months for the subject property.

An in-house underwriter that’s familiar with the area and financing in small towns, will look at the appraisal in a different light knowing the reason certain comparable sales over others were used and why, because of this they will normally always approve of the appraisal unless there is an apparent significant difference between the subject and comparable properties used.

The bottom line: please be patient with your agent!

This has become an issue in certain cases because a buyer has already been approved with a larger bank and becomes defensive when an agent encourages them to switch to a bank with in-house underwriters and doesn’t understand the process. I wanted to write this blog entry today to help buyers understand to please not get frustrated with your agent because they are not going through the trouble of trying to encourage you to switch to hurt you but to significantly help you in the long run. By the time an appraisal comes back and your bank either accepts an appraisal well under what the seller would be willing to take because they know their home is worth more or the underwriter throws the appraisal out altogether because of lack of comparable sales. At this point, the buyer will have spent lots of time and bank fees with a bank that in most cases was never going to be able to loan for the amount the property is under contract for if at all.