Mortgage Applications: Underwriters' Role And Your Loan

The mortgage underwriting process is an inevitable step in the mortgage application process. It involves a mortgage underwriter, who works for the lender, taking a deep dive into your credit report and financial history to determine whether to approve a mortgage loan and under what terms. The underwriter can either approve, deny, or pend your mortgage loan application. The process can take anywhere from a few days to a few weeks, depending on the complexity of the transaction and any issues that arise.

The role of a mortgage underwriter

A mortgage underwriter is an individual employed by the lender who takes a detailed look into your finances before making a credit decision on your loan. They assess the risk, ensure all the information provided is accurate, then evaluate factors to help better understand your financial situation. The underwriter has the option to either approve, deny or pend your mortgage loan application.

The underwriter will review your credit report to see how well you made payments on, or paid off car loans, student loans and other lines of credit. They will also look at your credit score (FICO) and credit history. They will review that payments have been made on time and look out for any red flags such as bankruptcies, accounts reflecting overdrafts or NSF charges, and irregular or large deposits into your accounts.

The underwriter will also assess your income, cash reserves, investments and debts. They will look at your bank statements to ensure sufficient funds are available for closing and reserves. They will also determine your debt-to-income (DTI) ratio – the total you spend monthly on debt payments divided by your gross monthly income.

The underwriter will also look at your property details. If an appraisal is required, the underwriter will review it to ensure it meets the Uniform Standards of Professional Appraisal Practice (USPAP) standards. They will compare the appraised amount to the mortgage loan amount.

The role of the underwriter is to ensure that you will be able to make loan payments and that the risk to the lender is acceptable.

What an underwriter looks for

Once a mortgage application has been submitted, it is passed on to a mortgage underwriter, who works for the lender. The underwriter is responsible for approving or denying the application. They do so by assessing the level of risk for the lender, and they have three options: approve, deny, or pend the application.

Underwriters will take a close look at the applicant's income, assets, debts, credit report, and property details. They will also determine the applicant's debt-to-income ratio (DTI) and loan-to-value (LTV) ratio. The DTI is calculated by dividing the total monthly debt payments by the gross monthly income, while the LTV ratio is the amount of money borrowed divided by the property's value. A high LTV ratio indicates a higher risk for the lender, so applicants can improve their chances by making a larger down payment upfront.

The underwriter will also review the applicant's credit report, including their credit score, credit usage, and payment history. A good credit score signals that the applicant makes on-time payments, which can help them secure a lower interest rate. However, a low credit score can lead to the application being denied.

In addition to the applicant's financial information, the underwriter will also consider the property itself. An appraisal is usually required to ensure that the amount borrowed is in line with the value of the home. The underwriter will compare the appraised amount to the mortgage loan amount. If the home is valued for less than the mortgage amount, the application may be suspended, and the applicant may need to negotiate with the seller or walk away from the property.

The underwriting process

The Three C's of Underwriting: Credit, Capacity, and Collateral

The underwriter, who works for the lender, will assess your credit history, capacity, and collateral. They will review your credit report, including your payment history, credit score, and credit usage, to evaluate your financial profile. A good credit score indicates timely payments and can help you qualify for a lower interest rate.

Income, Assets, and Employment Verification

The underwriter will verify your income to confirm that you earn enough to cover the monthly mortgage payments. They may request documents such as W-2s, pay stubs, bank statements, tax returns, and profit and loss statements, especially if you are self-employed. Additionally, they will consider your assets, as they can supplement your income during financial hardships.

Debt-to-Income Ratio (DTI)

Your debt-to-income ratio is a critical factor in the underwriting process. The underwriter will calculate your DTI by dividing your total monthly debt payments by your gross monthly income. Lenders use this ratio to assess your ability to manage your finances and make timely mortgage payments.

Property Appraisal and Title Search

An appraisal is typically required to ensure that the loan amount aligns with the value of the home. A certified appraiser will inspect the property, taking measurements and photos to determine its condition and features. The underwriter will compare the appraised amount to the mortgage loan amount. If the home's value is less than the mortgage amount, you may need to negotiate with the seller or cover the difference yourself. Additionally, a title search is conducted to ensure that the property can be legally transferred to you without any legal claims or issues.

Final Decision: Approve, Deny, or Pend

Once all the necessary information is gathered, the underwriter will make a decision on your mortgage application. They have the option to approve, deny, or pend your application. If approved, you may get a "clear to close," and you can proceed with scheduling the closing. However, if there are conditions attached to the approval, you will need to provide additional documentation or information. If your application is denied, you can understand the reasons and take appropriate next steps to address any issues.

Before underwriting

Before the underwriting process begins, a loan officer or mortgage broker collects credit and financial information for your application. This includes your credit score, credit report, credit history, and payment history. They will also look at your income, assets, debts, and property details.

The underwriter will also pull your credit report to review your payment history, credit usage, and the age of your credit accounts. They will also determine your debt-to-income ratio (DTI) by calculating the total you spend monthly on debt payments and dividing it by your gross monthly income.

Additionally, a valuation of the property is required to confirm the home's value aligns with the purchase price. The value of a home is determined by its size, location, condition, and features. Comparable homes in the neighbourhood are also considered. An appraisal is almost always required when purchasing a home, as it ensures you borrow no more than the home is worth.

It is important to have all your financial documents organised before applying for a loan. This includes employment information from the past two years, account information, and additional income information. Being truthful on your application and providing any necessary explanations for negative marks on your credit report can help speed up the underwriting process.

After underwriting

After the underwriting process, the underwriter will either approve, deny, or pend your mortgage loan application. If your application is approved, you may get a "clear to close" right away, which means there's nothing more you need to provide, and you can schedule your closing. However, if your approval comes with conditions, you'll need to provide additional documentation or information, such as signatures, tax forms, or prior pay stubs. It's important to respond promptly to any requests to keep your application moving forward.

If your application is denied, understanding the reason for the denial is crucial before deciding on your next steps. Common reasons for denial include having too much debt, a low credit score, or not meeting the eligibility criteria for a particular loan type. Once you know the reason, you can take steps to address the issue and potentially reapply in the future.

In some cases, your application may be suspended or pended. This could be due to missing documentation or other factors, such as the home being valued for less than the mortgage amount. In such cases, you have several options, including contesting the appraisal, negotiating with the seller to lower the purchase price, or providing additional funds to make up the difference.

After achieving final approval from the underwriter, there are still a few more steps before you can secure your loan. The lender will typically conduct a final review and quality control checks, including verifying your income, employment, and credit report once more. It's important to maintain consistency in your financial situation during this time to avoid any last-minute issues that could impact your loan approval.

Frequently asked questions