If you’re in the market for a mortgage loan, you would have encountered an agent or customer representative mention the phrase “mortgage underwriting process.”
You might have also run into some computerized approval programs that streamline the mortgage approval process. The fault of these applications however is, they have a default disapproval process if you have thin credit, bad credit or complicated sources of income.
Your hope, in this case, is to try manual underwriting (where you can still get an okay). The process is more tedious but if you need that loan, you’d comply with the requirements. Just think of it as the consequence of not being able to fit the standard financial mold that the lenders are looking for.
What Is A Mortgage Underwriter?
A mortgage underwriter is a person who analyzes your risk to see if the terms of your loan are acceptable to the lender. The underwriter will verify the authenticity and correctness of your application and documentation. They will also spend the effort to double-check if your finances are what you say they are.
Mortgage underwriting standards have risen lately, largely due to the new Consumer Financial Protection Bureau requirements which came in effect in the last few years. This calls for mortgage underwriters to scrutinize the applicant’s employment and financial history before granting a loan.
Depending on how the manpower structure of your lender is set up, the mortgage underwriter may be a part of an in-house underwriting team or a member of a separate processing/underwriting company that your lender hires to do the underwriting process. Lenders would follow different underwriting processes and they may delegate responsibilities to originators, processors, and underwriters differently. Check with your loan originator for instructions on what information you should submit and to whom.
How Does It Work?
The mortgage underwriter has only one focus: to assess risk. He will review all your documents from W2’s, tax returns, payslips, credit reports, a home appraisal, etc. He will look at your debt-to-income ratio, verify your income, your credit history, paying special attention to obvious and not-so-obvious red flags.
If he finds a single late payment or a collection account, he will ask for additional information. Following the mortgage lender rules, the underwriter may ask for a letter of explanation for any negative account, or obligate you to settle a certain collection account before you get a green light to close. Credit is one of the major causes why an underwriter recommends a thumbs down to a mortgage application.
How Does Underwriting Estimate Your Risk?
Underwriting determines your ability to repay the loan based on a systematic analysis of your credit, capacity to pay and the collateral you’re offering.
Credit, in the context of mortgage underwriting, pertains to how the loan applicant handles debt as well as their past debt history. Lenders get this information from the credit reports that the three credit reporting bureaus (Equifax, Experian, and TransUnion) generate.
The underwriter will not only look at the credit score but more on the content of the credit history. He looks for things like past loan performance on auto loans and credit cards if the applicant consistently paid on time.
A strong track record of paying on-time increases the would-be borrower’s chance of getting a loan. On the other hand, if there are entries such as debts that went into collection, the bank repossessing his car, or having declared bankruptcy, these are big black eyes. It could lessen his chance of getting loan approval.
Capacity indicates that the borrower would be able to repay the loan. In this aspect, the underwriter evaluates the borrower’s income, employment status, and current debts and assets. They get this information from the loan application and the borrower’s credit reports.
As a general rule, lenders will consider a self-employed individual to be of higher risk than an employed applicant who has a regular salary or income.
Lenders normally want to see at least two years of stable self-employment history to establish the trend that he can consistently earn income and show he is capable of earning continuously. In either case, the underwriter will check the last two years of work. He would often use pay stubs, tax returns or employment certificates to confirm this.
The other aspect of capacity is how big a dent the monthly payment will make on the borrower’s monthly income. Lenders would like to keep the debt-to-income ratio to 43% and below. What this means is that if the borrower is earning $4,000 a month, his total debt payments (mortgage and other debts) should not be more than $1,720 every month.
We get this by multiplying $4,000 by 43% ($4,000 x 0.43). So, if the applicant already has a car loan, a student loan and a few credit cards, the lender will incorporate their monthly payments to determine if he has not gone over the limit. If he hasn’t, the remaining amount would determine the maximum loan he can borrow from the mortgage.
The collateral is the lender’s back-up in case the borrower fails to pay back his loan. Therefore, they are very particular about the value and the type of property they will be financing. The underwriter must make sure that the loan they will grant will meet the loan-to-value requirements of the mortgage.
Otherwise, in case of default, they will not be able to recover the unpaid portion of the loan through the sale of the collateral. For the underwriter to get an accurate valuation of the property, he will order a home appraisal to assess the home’s current fair market value.
On top of this, the underwriter will check what kind of property the borrower wants to buy. This is to assess the risks that may come with the property since different properties carry different risks. For instance, lenders consider investment properties riskier than family homes. This is because their experience will tell that it’s much easier for borrowers to walk away from an investment property in a difficult situation than to let go of the property where he and his family currently live in.
How Long Does Underwriting Take?
Despite the meticulous process we described, an underwriter will only need a few hours to look at all the documents and make his recommendation to approve, suspend or turn down your application.
But mortgage lenders do not maintain a very big pool of underwriters so it’s normal that there will be more loan applications in the pipeline than there are underwriters. Given that, there might be quite a wait before your papers reach the top of the pile and get to the hands of an underwriter.
When it comes to FHA loans, the waiting time is even longer. Why? FHA loans carry a stiffer set of underwriting requirements and therefore take longer to pass than their conventional counterparts. It can take anywhere from a couple of days to a few weeks to complete the loan underwriting process for an FHA loan.
Many factors can get in the way. This is where the help of a veteran loan agent will come handy because he would know in advance what the underwriter would ask for and you could prepare for them ahead. If your loan officer did not ask you to make ready all the necessary documents, you might not be able to provide it to the underwriter fast enough. This will delay the underwriting process.
Automated Vs Manual Underwriting
You may be familiar with Fannie Mae and Freddie Mac. They happen to be the two largest government-sponsored buyers of mortgage loans in the United States. Banks and lenders follow their own set of guidelines in approving loan applications. Most of them, however, use an automated underwriting system for the initial steps.
They would start by encoding the loan application and all documents into their computerized system. The computer will make a decision based on a computer algorithm. So, it filters out those that get approved and those that they disapprove outright. These automated systems rely heavily on your credit score to determine whether or not you can buy and pay for a house.
You are likely to get an automated go-ahead on your loan if you have perfect credit, substantial down payment, and a low debt-to-income ratio.
If your loan application goes through the manual underwriting process, the reviewer won’t just rely on your credit score to approve or deny your application.
Instead, they will inspect your payment records and other documents that can satisfy them that you can repay your mortgage. Records like past rent payments, utility payments, gym memberships or even insurance payments will take the limelight. In regular practice, they manually underwrite FHA loans because borrowers who have bad credit or low income can still qualify for these loans.
Mortgage Underwriting Tips – How Can We Make It Quicker?
The underwriter is eventually the one who has the final say whether your loan gets the nod or not and when. However, there are several things you can do to lessen your risk and speed up the process a little.
- Be proactive. Once you have submitted your documents, don’t just wait. Give your employers a heads-up, call your loan officer to check and ask the underwriter if there are other documents you need to submit.
- Protect your credit score while your application is under process. The underwriter will check your credit twice during the process so be sure that it either improves or stays the same and it does not deteriorate.
- Respond promptly to requests. If your underwriter requests for a document or an explanation about something, respond immediately and accurately.
- Cooperate with your underwriter. Your underwriter would find it easier to review your documents if you make his life easier by providing everything he needs. After all, it is your dream house at stake here.