During the Great Depression local real estate communities were devastated which made lenders reluctant to grant mortgages on a grand scale. The government realized that lender’s reluctance to lend money could drastically affect the growth in the real estate market and the overall economy.
To incentivize lenders to approve more loans, particularly to higher risk borrower’s the United State’s government created the Housing of Urban Development (HUD) to help stabilize the market. One of the main agencies under HUD was the Federal Housing Administration. The FHA currently backs a little over 30% of all mortgages in the United State’s.
Purpose of Direct Endorsement Plans
To increase loan volume, government housing agencies have created the HUD direct endorsement plan, which grants certain brokers or lenders a direct endorsement lender status. This means the approved lenders who receive such status can act as underwriters on behalf of the FHA and have discretion to approve borrowers on behalf of the FHA. In this scenario, the lender is essentially working for the FHA in a private public capacity.
In a HUD direct endorsement plan, FHA approved lenders originate mortgages on behalf of the FHA at which point the HUD will endorse the approval. By granting a lender direct endorsement authority, lenders can underwrite loans. The purpose of granting a lender with the authority to approve loans is to close more loans quickly.
Determining a borrower’s eligibility requires the approved endorser to analyze the borrower’s credit, income, assets, and liabilities and determine the value of the property being used as collateral for the loan. Following the submission of all documents, the FHA will conduct an appraisal which can only be conducted by a FHA approved appraiser. Once all documents and inspections have been completed, the direct endorsement underwriter reviews the file to ensure the borrower is a qualified borrower.
How Direct Endorsement Plans Work
The FHA guarantee’s losses to lenders in the event borrower’s default on their mortgages. Of course not everyone can be approved for an FHA backed mortgage. The FHA has created basic guidelines that if borrower’s qualify for, they can get approved for a loan based on an approval from an FHA approved lender.
The direct endorsement plan grants lenders the right to approve loans on behalf of the FHA assuming borrower’s meet the FHA’s loan guidelines.
If a borrower qualifies for a HUD direct endorsement plan, he or she does is not required to go through the standard exhaustive process of qualifying for a loan. To qualify for this program, a borrower must apply through a HUD qualified lender.