The loan processor you work with when you apply for a mortgage isn’t the person who decides whether you qualify for a loan. That power lies with the mortgage underwriter. How do underwriters decide whether applicants will get a loan?
The mortgage underwriter’s job
The underwriter’s job is not to make you dance like a puppet on a string for approval. The underwriter is a risk analyst, assessing your ability to repay the loan. If you’re unable to pay your mortgage, then you, your mortgage company and even the federal agencies that back most mortgages will suffer. The underwriter’s job is to decide whether making a loan is in everyone’s best interests.
In 2013, the newly created Consumer Financial Protection Bureau tightened underwriting standards to add additional safeguards to help prevent mortgage defaults.
Interestingly, you will never speak with your mortgage underwriter during the approval process, only the processor.
Evaluating your ability to pay
The processor will ask you to complete a loan application and supply basic documents such as pay statements, three or more months of bank statements, and past tax returns. The processor will pull your credit history from one or more of the three credit bureaus.
After the mortgage underwriter initially evaluates your information and the amount of the down payment you are planning, he may ask for additional documents and explanations. For example:
- If you are self-employed, expect to provide detailed financial and tax statements on your business for prior years.
- If bank records show you’ve made a large deposit in addition to your regular pay, the mortgage underwriter will want to know more about it. Was this money a gift, or a personal loan you’re obligated to pay back?
- The mortgage underwriter may ask for a letter from your employer on the viability of your future with the company.
- If you are divorced, the underwriter will want a copy of the divorce decree as well as information on your alimony and child support obligations.
- In reviewing your credit history, the mortgage underwriter will look at how many open credit lines you have, payment histories, current debt balances and credit limits. He will also take note of any defaults within the previous seven years and bankruptcies within ten.
Your debt-to-income ratio is a pivotal metric assessing your ability to repay. The underwriter wants to see debt payments totaling no more than 43 percent of your monthly income.
The underwriter considers the amount of savings and investments you have and whether you will have the ability to make at least six months of payments should you lose your income.
Evaluating the property
Generally the property you are purchasing is the collateral for your home loan, so the lender will have it appraised. If the property appraises for less than you have agreed to pay for it, the mortgage underwriter will not approve your loan. In order to get the underwriter’s approval, you’ll either have to make a larger down payment (so the mortgage company will have less at risk) or negotiate a lower price with the seller.
Additionally, the mortgage underwriter will have the property inspected. He may make approval of your loan conditional on repair of certain defects found.
As the mortgage underwriter does his work, the title company is searching public records for issues that might endanger the lender’s claim to the property as collateral. Existing liens, easements and other matters could encumber the title, which means someone else might have a superior claim on the property.
Do this, not that
Before you begin the home buying process, apply for mortgage preapproval with a lender. Sellers and their agents prefer to deal with serious buyers only, and preapproval shows that’s what you are.
Apply for a mortgage immediately after signing the sales contract. The clock is ticking toward closing, so respond to document and information requests promptly.
While the loan is being processed, do not start a new credit account or make a large purchase like a car or appliances. Pay cash as much as possible for daily expenses to avoid running up credit card balances.
The mortgage underwriter’s decision
Your mortgage application could be approved anywhere from a week or two after you apply to right before closing.
If the mortgage underwriter needs more information before he can approve your loan, he will classify your application as “suspended.” Suspensions are most often related to your income or assets but also could be because the underwriter wants an explanation for late credit payments.
If your application is denied, you must start over with a new lender, which may cause you to lose your current deal. This will sting, but understand that the underwriter has decided in everyone’s best interest that you would be too much at risk with the loan.
Related – FAQs on Financing Your First Home