Explaining the Loan Process Part 4: Mortgage Underwriting
02/01/2018 Kristin Demshki
During the mortgage underwriting stage, your application moves from the desk of the loan processor to the mortgage underwriter. The mortgage underwriter will ensure your financial profile matches your lender’s guidelines and loan criteria and he or she will ultimately make the final decision: to approve or deny your loan request.
Your mortgage underwriter plays a huge role in whether or not you land your dream home so it’s important to set yourself up for success during the underwriting process. Like the loan application processing, much of the work in this stage of the loan process will be in your underwriter’s hands. However there are steps you can take to improve your overall financial health and increase your chances of being approved.
What Is a Mortgage Underwriter?
A mortgage underwriter is responsible for analyzing your risk to determine if the terms of your loan are acceptable. The underwriter will investigate to make sure your application and documentation are truthful and they will double-check you have described your finances accurately.
Mortgage underwriting standards have become more stringent, thanks in large part to new Consumer Financial Protection Bureau requirements enacted in the last few years. This requires mortgage underwriters to look closely at the applicant’s employment and financial history before approving a loan.
Depending on your lender, the mortgage underwriter may be part of an in-house underwriting team or they may be be part of a separate processing/underwriting company your lender uses to outsource the underwriting process. The underwriting process may vary slightly among lenders, who can delegate responsibilities to originators, processors and underwriters differently. Make sure to check with your loan originator for guidance on what information to send to whom.
How Underwriters Assess Risk
In order to assess a borrower’s risk, mortgage underwriters look at the “Three C’s” of underwriting:
- Capacity: Do you have the means and resources to pay off your debts? Underwriters assess your available resources by reviewing your employment history, your income, your debts and your asset statements. (Note: If you are self-employed, you may be asked to provide much more documentation of your income and work status.)
They will also review your savings, checking, 401(k), and IRA accounts to ensure you can still pay your mortgage if you lose your job or become ill. Underwriters will pay particular attention to your debt-to-income ratio; they want to make sure you have enough money to fulfill your current financial obligations, as well as take on a new mortgage.
- Credit: Do you have solid repayment and credit history? Your credit is one of the most important factors in the loan approval process. The underwriter will review your credit score to see how you have handled past bills (i.e. auto loans, student loans, and home equity lines of credit) and predict your ability to make the proposed mortgage payments on time and in full.
- Collateral: What is the value and type of property being financed? The mortgage underwriter must make sure the loan amount meets the loan-to-value requirements of the product. Otherwise, in the case of a default, a lender may not be able to recover the unpaid balance of the loan. In order to place a value on the property, an underwriter will typically order a home appraisal, which will assess the home’s current worth.
In addition, the underwriter will likely review the type of property you are looking to buy. This is important because different types of properties carry different risks. For example, many lenders consider an investment property a riskier investment; this is because, historically, a borrower is more likely to walk away from an investment property than their primary residence in a difficult financial situation.
Tips for Speeding Up the Underwriting
While the underwriter is ultimately responsible for the approval of your loan, there are a few things you can do to reduce your risk and make the process go more smoothly:
Protect Your Credit Score
These days, many lenders are required to check the borrower’s credit twice during the home loan application process: once during pre-approval and once right before closing. It is important to protect your credit score during the entire application process, which includes making your payments on time, keeping your current job, staying with your current bank, maintaining low credit card balances and avoiding major purchases (e.g. a new car, new furniture) until you have closed on your mortgage. Any changes to any of the above can delay your loan process or adversely impact your ability to obtain a loan.
Respond Promptly to Requests for More Information
For the purposes of approving or denying your loan, a mortgage underwriter is essentially a real estate and financial investigator. This means they will be reviewing all of your documentation and paperwork in detail and reaching out for more information when something is incomplete. Don’t be concerned if they ask for clarification on a late payment, a missed signature or a large deposit—these are all normal requests. The important thing is to respond quickly and accurately, which will reduce the length of the underwriting stage and improve your chances of being approved.
Be Proactive about Your Loan Approval
The underwriter will take care of reaching out to the necessary parties, but that doesn’t mean you have to sit back and wait. Give your employers or other relevant parties advanced notice that they may be contacted to provide information. Call your lender and/or broker to check on the status of your application to make sure the underwriter is not missing any necessary information. In addition, keep records of your conversations with your lender so you have a record of what documents were provided and when.
Cooperate with Your Underwriter
With your dream home at stake, the underwriting process can seem very intimidating. However, being prepared and filling out your application and supporting documents carefully and accurately will save you precious time—and make your underwriter happy. A PennyMac Loan Officer will be happy to answer any additional question you may have about the underwriting process.