Understand Top Defects to Help Strengthen Loan Quality
As a mortgage lender, your commitment to high quality loans keeps your organization fiscally sound and supports sustainable homeownership for your borrowers. The latest insights from our post-purchase file reviews provide valuable information on top defects and trends, enabling you to identify areas for improvement in your quality control (QC) program to help mitigate risk.
To maximize the benefits of this information, consider:
- How can you leverage these industry insights to enhance your QC reviews and prevent similar defects?
- What adjustments can you make to your discretionary sampling and QC processes to better align with industry best practices?
- Are there opportunities to utilize tools, such as the Desktop Underwriter® (DU®) validation service (DVS) or Income Calculator, to drive greater certainty and accuracy?
- How can you use these findings to inform your training programs and improve your controls to reduce the risk of future defects?
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Random Sample
We perform post-purchase file reviews on a regular cadence to identify significant defects that affect eligibility. Below are the top ten initial significant defects identified in our random sample of loans acquired during the first quarter of 2025 (January 2025 to March 2025).
Top 10 initial significant defects Q1 2025: random sample
- Misrepresentation of primary occupancy
- Incorrect income calculation – rental income/loss
- Incorrect income calculation – base
- Ineligible property – safety, soundness, and structural integrity
- Income not documented – rental income/loss
- Monthly payments not properly calculated
- Omission of debts documentation missing
- Appraisal - Completion report or 1004D alternative – missing
- Gift documentation – missing
- Incorrect income calculation – self-employment
Significant defect:
a loan manufacturing error that makes the loan ineligible for delivery to Fannie Mae and requires remediation. A potential repurchase is possible.
Initial significant defect:
when a significant defect has been cited prior to a final remediation activity.
| Top Defect |
|---|
Incorrect income calculation – rental income/loss
|
| Best Practices |
|---|
Confirm the borrower has the required rental management history that is supported by required documentation. Double-check the rental income calculation, as many issues result from a lower-than-actual rental loss. For example, a loan may be submitted with a rental loss of $200, but the second-level review may confirm an actual rental loss of $600. The $400 difference may be enough to significantly impact the DTI. Leverage Income Calculator to determine whether the income is eligible for the transaction. Income Calculator helps lenders calculate accurate rental income and provides representation and warranty relief for the calculation. Lenders remain responsible for accurate entry of data. |
| Top Defect |
|---|
Ineligible property – safety, soundness, and structural integrity
|
| Best Practices |
|---|
Closely review appraisal photos for evidence of structural damage to the property (e.g. holes in the roof or a chimney pulling away from the house). Review photos for issues that indicate structural or foundational damage (e.g. water stains on ceilings or moisture penetration in the basement). Reports prepared by a qualified professional, with commentary and photos, must accompany the loan file. Reports must state the property issues do not pose any threat of structural damage to the property or that they have been rectified. Ensure processes are in place to evaluate the appraisal and verify the property condition is accurate and the appraisal does not list physical deficiencies or adverse conditions that would invalidate the value warranty relief. |
Targeted and Discretionary Samples
Discretionary samples look for loans with a greater likelihood of having manufacturing quality defects. Since these reviews are purposefully targeted, there are a few differences in the top defects when compared to our random sample.
Almost half of the defects relate to property appraisal issues.
Below are the top ten initial significant defects identified in our discretionary sample of loan reviews completed during the first quarter of 2025 (January 2025 – March 2025).
Top 10 initial significant defects Q1 2025: discretionary sample
- Undisclosed liability
- Borrower not employed
- Undisclosed mortgage(s)
- Employment validation – borrower not employed
- Inappropriate comparable sale selection due to location
- Inadequate comparable adjustment
- Failure to adjust comparables
- Interested party contributions exceed borrower costs
- Use of dissimilar comparable sales due to site characteristics
- Misrepresentation of primary occupancy
| Top Defect |
|---|
Undisclosed liabilities
|
| Best Practices |
|---|
Speak with borrowers about upcoming financial obligations with payments due before the closing date and explain those obligations may push DTI out of tolerance. Leveraging targeted questions, typically using inquiries on the credit report as a basis, can prevent future problems. If you have debt monitoring capabilities in your process, remain vigilant. Monitor data from all three bureaus; debt monitoring tools may only pull data from one credit bureau. Ensure debt monitoring runs on weekends and is reviewed as closely to closing as possible. |
| Top Defect |
|---|
Expired employment validation
|
| Best Practices |
|---|
| Implement a hard stop to prevent loans from closing if the close-by date is not met. For the validation to apply, the borrower must be employed as of the close-by date. |
| Top Defect |
|---|
Borrower not employed
|
| Best Practices |
|---|
| Speak with borrowers at the beginning of their loan application process about potential changes in employment that may develop in the following 60 days. Understanding borrowers’ employment status creates confidence in the origination process and prevents complications both prior to and after closing. |
Findings
Reviewing findings from a random sample of loans can help you discover potential future issues. Since findings do not create eligibility defects, monitoring findings allows you to take proactive steps to mitigate risk, improve loan quality, and maintain customer trust.
Below are the top ten findings identified in our random sample of loans acquired during the first quarter of 2025 (January 2025 to March 2025).
Top 10 findings Q1 2025: random sample
- Subject physical features reported inaccurately – condition/quality of construction
- Inadequate comparable adjustments
- Failure to adjust comparables
- Comparable sales physical features reported inaccurately – condition/quality of construction
- Omission of debts - documentation missing
- Asset documentation incomplete/ineligible
- Subject view of location reported inaccurately
- Income not documented - base
- Insufficient assets to close
- Higher eligible income not used at origination
Finding:
A loan manufacturing error that does not impact the eligibility of the loan. However, the same error could result in a significant defect in different loan scenarios.
This quarter, five of 10 findings were related to information in appraisals. Discrepancies were often cited between appraisal data and our data. Share appraisal findings with appraisal management companies or appraisers to help them better understand our appraisal reviews.
By making the most of these insights on top defects and trends, you can strengthen your quality control, mitigate risk, and drive long-term success. Start enhancing your loan processing today and reap the rewards of improved certainty, reduced risk, and increased customer satisfaction.
