The Challenge Of Mortgage Underwriting: Is It Tough?

Mortgage underwriting is a crucial step in the loan approval process. It involves a lender reviewing your finances and the property you want to buy to determine whether to approve your loan application. This process can be completed manually or through an automated underwriting system. The underwriter will assess your credit history, income, assets, debts, and employment history to estimate the risk of issuing the loan. They will also evaluate the property's worth through an appraisal or other valuation methods. The underwriting process can take a few days to a few weeks, and it is important to provide all the necessary documentation promptly to ensure a smooth process.

The role of a mortgage underwriter

The underwriter will also order a property appraisal to determine the home's market value and ensure that the loan amount does not exceed the property's value. They will review the appraisal to ensure it meets the Uniform Standards of Professional Appraisal Practice (USPAP) standards. This protects both the buyer and lender by ensuring the buyer does not pay more than the home is worth, and the lender can recoup the loaned money in the event of default.

The underwriter will also verify the applicant's identity and review any supporting documentation, such as bank deposits or proof of assets. They look for red flags that may indicate financial mismanagement, such as accounts reflecting overdrafts or large deposits, which could be indicative of undisclosed debt.

Overall, the mortgage underwriter's role is to ensure that the applicant has the financial capacity to take on the loan and that the lender is not taking on excessive risk by granting the loan. The underwriter's decision will be based on a variety of factors and guidelines, and they will either approve, deny, or pend the mortgage loan application.

The mortgage underwriting process

• Loan Application: First, you need to fill out a loan application, providing information about your financial background, income, debts, credit history, and property details. This information will help the lender or underwriter assess your eligibility for a loan.
• Document Collection: Once you've submitted your application, a loan processor will gather and organise the necessary documents for the underwriter's review. This includes income verification documents, such as W-2s, pay stubs, tax returns, and bank statements. Self-employed individuals may need to provide additional documentation, such as profit and loss statements.
• Credit History Review: The underwriter will review your credit report, credit score, and payment history to assess your creditworthiness and ability to repay the loan. They will look for clues that indicate your ability to manage debt and make timely payments.
• Financial Assessment: Underwriters will evaluate your financial situation, including your income, assets, investments, cash reserves, and any outstanding debts. They will analyse your debt-to-income ratio and ensure you have sufficient financial reserves to cover closing costs and mortgage payments.
• Property Appraisal: An independent appraisal of the property's value is conducted by a certified appraiser. This ensures that the loan amount you're requesting aligns with the actual value of the home. The appraisal considers factors such as the size, location, condition, and features of the property, as well as comparable homes in the neighbourhood.
• Title Search: A title company or insurer will research the property's history to ensure there are no liens, claims, unpaid taxes, zoning issues, or other legal encumbrances that could affect the transfer of ownership.
• Decision and Conditions: Based on the information gathered, the underwriter will make a decision to approve, deny, or pend your loan application. If approved, there may be conditions to fulfil, such as providing additional signatures, tax forms, or prior pay stubs. If denied, understanding the reasons will help you address any issues before reapplying.

It is important to note that the underwriting process can be lengthy, and any missing documents or issues with the appraisal or title search can cause delays. Promptly responding to requests for additional information and maintaining open communication with your mortgage loan officer will help ensure a smoother underwriting process.

How long does mortgage underwriting take?

The duration of mortgage underwriting varies from a few days to several weeks, or even months. According to the National Association of Realtors (NAR), it usually takes more than a week, with an average timeline of 45 to 60 days. However, it can be faster if there are no complications.

The time taken depends on various factors, including the lender, the complexity of the borrower's financial history, and the completeness of the documentation provided. Some lenders are known for their speed, while others with lower overhead may offer lower rates but operate more slowly due to less experienced or overworked staff.

A mortgage underwriter assesses the borrower's finances, credit history, and the property's value to determine the level of risk for the lender. This process involves verifying the borrower's income, debt-to-income ratio, credit score, and the loan-to-value ratio of the property. The underwriter ensures that the borrower can repay the loan and that the loan amount does not exceed the property's value.

To expedite the underwriting process, it is advisable to have all the necessary documents ready and maintain healthy financial habits. Avoiding new credit applications during this period can also prevent delays. Responding promptly to requests from the loan officer and providing additional documentation as soon as possible can also speed up the process.

Manual vs automated underwriting

The mortgage underwriting process is when a lender evaluates the risk of providing money to a borrower. It takes place late in the home-buying process and helps mortgage lenders determine if the borrower's financial status is solid enough to repay the home loan they are applying for.

Automated underwriting is typically used for conforming loan amounts, and a computer program uses a small amount of inputted information, such as a Social Security number and address, to learn about the borrower's finances. The automated system compares the borrower's credit score, debt, and other factors to the requirements and guidelines of the loan they are applying for.

Manual underwriting, on the other hand, is when a human underwriter reviews a borrower's finances in detail to determine whether they meet a loan's requirements. This process is more time-consuming than automated underwriting but can benefit certain applicants, such as those with no credit history or debt, or those with past financial problems. Manual underwriting can also be useful for borrowers with complex financial situations, such as self-employment or applying for a jumbo loan.

Lenders may also use a blend of both automated and manual underwriting to ensure that qualified borrowers are not rejected and unqualified borrowers are not mistakenly approved.

While most lenders rely on algorithms to determine mortgage approval, manual underwriting can be an option when an algorithm rejects an application.

What does a mortgage underwriter look for?

The primary role of a mortgage underwriter is to evaluate the risk assumed by the lender if they approve your loan. They do this by assessing your finances and the likelihood that you can repay the loan on time.

Mortgage underwriters look at a variety of factors, including your credit history, income, and any outstanding debts. They will review your credit report to see how well you have made payments on or paid off other loans, including car loans and student loans. They will also review your bank statements to ensure sufficient funds are available for closing and reserves. The reserves measure the number of months you could make your mortgage payment if there were a loss to your income. They will also look at your credit score, which is driven by factors including payment history, credit usage, and any derogatory events such as bankruptcies.

Underwriters also consider the LTV (loan-to-value) ratio of your mortgage: how much money you are borrowing divided by the property's value. A higher LTV ratio indicates that the lender could lose a lot more money if you default on the mortgage. To protect both the buyer and lender, an underwriter will order a home appraisal to see if the price you plan to pay is in line with its determined value. The value of a home is determined by its size, location, condition, and features, as well as comparable homes in the neighbourhood.

Additionally, the underwriter will verify your identity and employment, and if you are self-employed or own a business, they may require additional documentation such as Federal Income Tax returns.

Frequently asked questions