Mortgage Underwriters:
Your Key to Home Loan Approval [2023]

Part 1: Who is A Mortgage Underwriter?

A mortgage underwriter is a professional responsible for evaluating a borrower's financial profile to determine the risk associated with providing them with a mortgage loan.

They analyze the borrower's credit history, income, employment status, assets, and other relevant factors to make an informed decision on whether to approve or deny a mortgage application.

Mortgage underwriters work with different types of lenders, including banks, credit unions, online lenders, and more. Their primary goal is to investigate applications and ensure that borrowers can pay back their loans to these lenders. They ensure that every piece of information tendered by a borrower meets the loan requirements of the lenders.

Part 2: What Does A Mortgage Underwriter Look Out For

Mortgage underwriters assess various factors to determine a borrower's ability to repay a mortgage loan. These factors can be broken down into four main categories: income, property, assets, and credit.

Income

Underwriters verify the borrower's income to ensure they have a stable and consistent source of earnings.

They will typically request documentation such as pay stubs, W-2 forms, and tax returns to confirm the borrower's income. They may also consider the borrower's job stability, industry, and employer's reputation.

If the borrower is self-employed or a freelancer, underwriters may require additional documentation like profit and loss statements or business tax returns.

Property

The property being purchased with the mortgage serves as collateral for the loan. As a result, underwriters evaluate the property's value, condition, and marketability to ensure that it is sufficient to secure the loan if the borrower defaults.

They do this by ordering an appraisal, which is a professional assessment of the property's worth. Underwriters also review the property type, location, and comparable sales in the area to determine if it meets the lender's guidelines and requirements.

Assets

Underwriters evaluate a borrower's assets too when determining their capabilities to pay back the home loan. They check for things like the borrower's checking and savings accounts, stocks, real estate, and other properties. All these are highly liquid and can be sold for cash in case the borrower defaults on payments.

During the investigations, an underwriter may question any irregular flow of deposits into the borrower's savings account. They do this to ensure that the borrower isn't relying on gifts or other loans for those amounts.

Credit

A borrower's credit history and credit score are critical factors in the underwriting process. Underwriters assess the borrower's past payment history, outstanding debts, and credit utilization to determine their creditworthiness and ability to manage debt responsibly.

The underwriter ensures that the borrower's credit score meets the minimum requirements set by the lender. They do a hard credit pull to access the borrower's payment history, credit length, and credit usage.

In addition, the underwriter uses the borrower's credit report to determine their debt-to-income ratio. This helps them to decide whether they have enough to pay the mortgage after covering other monthly payments and expenses.

Part 3: What Are The Common Risk Factors Mortgage Underwriters Look Out For?

Mortgage underwriters must identify and assess various risks associated with a borrower's financial profile. Some common concerns that underwriters may encounter during the loan evaluation process include:

Returned checks or Non-Sufficient Funds (NSFs) charges

Non-Sufficient Funds (NSFs) is a term used in banking to depict that a bank account does not have sufficient cash to cover a transaction. When a borrower has a lot of this in their bank statement, underwriters query it because it may indicate that they have difficulties managing their finances.

Underwriters also watch out for returned or bounced checks in the bank statement. Frequent occurrences of such may raise concerns about the borrower's financial ability to repay the mortgage later.

Large deposits

Unexplained or undocumented large deposits in a borrower's bank account can raise concerns for underwriters. They need to ensure that the borrower has not taken out undisclosed loans or received unverifiable gifts to cover the down payment or closing costs.

Borrowers may be required to provide documentation explaining the source of any significant deposits and verify that they meet the lender's guidelines.

Credit issues

Underwriters will scrutinize a borrower's credit history for any derogatory items, such as late payments, charge-offs, collections, or public records like bankruptcies, foreclosures, or tax liens.

All these credit issues usually indicate the struggle of the borrower in the past managing their debt. That increases the risk of lending to them, so the underwriter requests letters of explanation. These letters of explanation are an opportunity given to borrowers to explain the inconsistencies in their credit history.

The underwriter may also ask the borrower to resolve the credit issues before they can go further with their mortgage application.

Employment issues

Since income is an important indication of a borrower's ability to repay loans, the underwriter looks into their employment records to verify their income flow. If they find such things as frequent job changes, gaps in employment, or a recent switch to a different history, they may issue queries.

In such cases, they may require additional documentation, such as offer letters, proof of income from the new job, or a detailed explanation of the employment situation.

Bankruptcies or foreclosures

A past bankruptcy or foreclosure can significantly impact a borrower's ability to obtain a mortgage. Underwriters will review the circumstances surrounding these events and evaluate the borrower's credit history since the bankruptcy or foreclosure.

They consider how long it's been since the foreclosure or bankruptcy happened to see if the borrower meets the lender's waiting period requirements. The waiting period refers to the period a borrower has to wait after bankruptcy or foreclosure before qualifying for a mortgage.

Part 4: What Are The Activities Of A Mortgage Underwriter?

Mortgage underwriters perform several tasks during the underwriting process to ensure that the borrower meets the lender's guidelines and that the loan complies with regulatory requirements. Here's a detailed look at some of the key responsibilities of a mortgage underwriter:

Investigate The Credit History and Credit Score Of The Borrower

An underwriter evaluates a borrower's credit history and score, then investigates any negative items found in the records. They usually look into elements like late payments, bankruptcies, foreclosure, charge-offs, and any other item that may affect the borrower's ability to repay their loans.

On the bright side, the underwriter also acknowledges patterns of responsible credit usage, high credit score, on-time payment, credit mix, and long length of credit usage.

Call For An Appraisal of Mortgage Property

An appraisal is a professional assessment of a property's value, and it's a crucial component of the mortgage underwriting process. Underwriters order appraisals to ensure that the property being purchased serves as adequate collateral for the loan.

The appraisal helps determine if the loan amount is appropriate based on the property's value, condition, and marketability. Appraisals also help protect both the lender and the borrower from overpaying for a property or entering into a mortgage with insufficient collateral.

Confirm Employment and Income Streams

A mortgage underwriter verifies the income sources of a borrower as claimed in the application. They review documents like pay stubs, W-2 forms, tax returns, court orders, alimony proofs, child care proofs, benefits, and other income sources.

In addition to checking the income sources, an underwriter may also contact a borrower's employer to ascertain their employment status and income flow.

In cases where the borrower is self-employed or a freelancer, the underwriter may request additional information, like bank statements, profit and loss accounts, and work profiles. This is done to check the stability and reliability of the borrower's income stream.

Look at your debt-to-income ratio (DTI)

The debt-to-income (DTI) ratio is a critical metric that underwriters use to assess a borrower's ability to manage their monthly debt obligations.

The DTI ratio is calculated by dividing the borrower's total monthly debt payments (including the proposed mortgage payment) by their gross monthly income.

Underwriters evaluate the borrower's DTI ratio to ensure it falls within the lender's acceptable limits, which helps determine if the borrower can afford the mortgage payment without stretching their finances too thin.

Checks Proofs For Down Payment And Savings

Underwriters are responsible for verifying that the borrower has sufficient funds to cover the down payment, closing costs, and any required reserves.

They check the borrower's bank balance, bank statements, investment accounts, savings accounts, assets, and any other elements that prove their ability to cover the down payment and also mortgage payments.

Any irregular deposits in the accounts may also be investigated to ascertain their sources.

Gives A Verdict On Accepting Or Rejecting A Borrower's Mortgage Application

After a thorough review of a borrower's finances and ability to repay loans, the underwriter decides whether their loan application be approved or not. They may approve, approve conditionally, suspend the decision, or deny the loan.

An approval means a borrower is trustworthy and deemed fit to get the loan. It means they have met all the loan requirements and have the ability to repay the mortgage.

Conditional approval means that the borrower's loan may be approved completely if they meet certain conditions. They may ask for extra documents to confirm some information.

A pending decision means that the underwriter requires additional information to approve the loan. This is different from conditional approval because it is a more serious query case.

Lastly, the underwriter may deny a borrower's loan application even if they were previously pre-approved.

If the underwriter denies the loan, they will typically provide the reasons for the decision, allowing the borrower to address the issues and potentially reapply in the future.

Part 5: What Are The Reasons A Mortgage Underwriter May Deny A Loan?

Your FICO score is too low

If a borrower's FICO score is below the minimum threshold required by the lender or the loan program, the underwriter may decline the loan application.

Low credit scores can indicate a history of poor credit management, late payments, or other negative credit events. Borrowers with low credit scores may need to improve their credit before reapplying for a mortgage.

Unstable Income Streams

Inconsistencies in the income flow of a borrower can cause an underwriter to decline the loan application. For instance, a borrower with a history of changing jobs at short intervals may have an unstable income flow.

Another indication of unstable income streams is gaps in employment. This means that the income flow ceased for a long time before the borrower secured another job. Since the underwriter does not want to take risks of such happening during the mortgage term, they may decline the application of such a borrower.

You have a higher amount of debt

A high debt-to-income (DTI) ratio can be a red flag for mortgage underwriters. If a borrower's DTI ratio exceeds the lender's maximum limits, the underwriter may determine that the borrower is overextended and unable to afford the additional debt of a mortgage payment.

In such cases, borrowers may need to pay down existing debt or increase their income before reapplying for a mortgage.

Insufficient funds to close your loan

The closing cost is an important fee which any mortgage borrower must have to complete their loan process. If you don't have enough money to settle the closing cost, you will not be allowed to close.Ultimately, the underwriter may conclude the evaluation and deny your loan.

So, before you apply for a mortgage, it is important to prepare the closing cost the same way you're preparing the down payment.

Issues with the house

Underwriters usually require a home appraisal to determine whether it is worth the price tag. If after the appraisal, major problems like bad foundation, code violations, structural defects, or environment hazards are uncovered, your mortgage may be denied.

In these cases, the borrower may need to negotiate repairs with the seller, obtain a renovation loan to address the issues or look for a different property.

It's important to remember that every lending institution has its guidelines and requirements. If a mortgage underwriter declines a loan, borrowers should review the reasons for denial, address any issues, and potentially explore alternative lenders or loan programs that may have different eligibility criteria.

Additionally, working with an experienced mortgage broker or loan officer can help borrowers navigate the underwriting process and increase their chances of loan approval.

FAQs

How Does Automated Underwriting Differ From Manual Underwriting?

Automated underwriting is a computerized process that uses algorithms and predefined criteria to evaluate a borrower's mortgage application. It can provide a quick preliminary assessment of a borrower's creditworthiness and eligibility for a loan.

Conversely, manual underwriting involves a human underwriter who handles all the evaluations and investigations of your financial situation by themselves. The underwriter does not rely on software or an automated system to examine your DTI ratio, LTV ratio, assets, liabilities, income, employment, and credit information.

Manual underwriting is usually engaged when a borrower fails the automated underwriting process or has some unique circumstances. When such a lender receives a denial verdict from the automated system, a lender may ask the manual underwriter to step in and carry out the evaluations.

What are the 4 C's of mortgage underwriting?

The 4 C's of mortgage underwriting refer to four key factors that underwriters consider when evaluating a borrower's ability to repay a mortgage loan. They are:

• Credit: The borrower's credit history, credit score, and payment habits help determine their creditworthiness.
• Capacity: The borrower's ability to repay the loan, including their income, employment history, and debt-to-income (DTI) ratio.
• Capital: The borrower's assets, including savings, investments, and other financial resources can be used to cover the down payment, closing costs, and any required reserves.
• Collateral: The property that serves as security for the loan, which is evaluated through an appraisal to determine its value, condition, and marketability.

How Do I Increase My Approval Chance In The Underwriting Process?

• Ensure your credit information meets the lender's requirements
• Reduce your overall debt and maintain a low debt-to-income (DTI) ratio.
• Tender credible income proofs and employment history.
• Prepare to pay a larger down payment.
• Stay alert and respond quickly to requests from the underwriter.
• Work with an experienced mortgage broker or loan officer who can guide you through the process and help address potential issues before they become obstacles.