As a key step in the mortgage loan process, mortgage underwriting can make or break your chances of obtaining a loan. Mortgage underwriting is the process that helps a lender assess the risk of offering a mortgage loan to a particular borrower. Performed by a person called an underwriter, this task can result in approval, denial, or even suspension of a borrower’s loan application.
Mortgage Underwriters build financial profiles based on the three Cs of mortgage underwriting: credit, capacity, and collateral.
When evaluating a loan application, mortgage underwriters place considerable weight on your credit. In addition to credit score, your debt-to-income ratio (DTI) comes into play. Both credit score and DTI will help the underwriter predict your ability to pay mortgage payments on time.
Capacity refers to your ability to pay back the mortgage. In order to determine this likelihood, the underwriter analyzes employment status, annual income, and level of debt. Additionally, the mortgage underwriter will review many of your assets, such as savings and checking accounts, stocks and bonds, your 401(k), and IRA accounts. Underwriters will also look at any cash reserves you may have in order to measure the number of months you could sustain yourself in the event of being laid off or stricken with sickness.
Mortgage underwriters also consider any of your collateral and the value of the property itself. During the underwriting process, your lender will order a home appraisal to assess the home’s current worth. This ensures that the lender doesn’t lend out more than the home is worth. Additionally, underwriters also consider what kind of property the borrower is seeking financing on. Investment properties, for example, are viewed as riskier than an owner-occupied home.
Due to all the criteria mortgage underwriters must consider, there is myriad of forms, papers, and documents to fill out and process. Documents required from you include letters of explanation, bank statements, W-2 forms from the last 2 years, and most recent pay stubs.
Many loans today are backed by the GSEs Fannie Mae and Freddie Mac, the Department of Veterans Affairs (VA), or the Federal Housing Administration (FHA). The mortgage underwriting process for these loans must follow the rules set by the organization that owns the loan.
How long does mortgage underwriting take?
Depending on the size of the lender, the length of time it takes for you to complete the mortgage underwriting process can vary. The larger the lender, the longer the time – it takes about 45-60 days to go through the mortgage underwriting process with a large bank. However, a smaller company can complete the underwriting process in as short as a week. Look around to find the best lender option for you.
What does a mortgage underwriter do?
Mortgage underwriters are required to have expansive knowledge in various topics such as consumer lending regulations, tax returns, and balance date sheets, and risk assessments. The decisions made by mortgage underwriters have serious impacts on business outcomes and one’s ability to eventually purchase a home. Additionally, mortgage underwriters must be authorized to work by completing an underwriter certification program. All mortgage underwriter jobs must follow all loan regulations and have strong communication skills in order to work with others in the mortgage process. Experienced mortgage underwriters are imperative for a successful mortgage business.
The mortgage underwriting process:
If the mortgage underwriter denied your loan application, there are other alternative options. First, consider a counteroffer. Based on your income or collateral, you may qualify for a smaller loan. Furthermore, contact other lenders to consider alternative opportunities. There are other loans with less restrictive underwriting guidelines that may be a better fit. If you have been denied for legitimate reasons, the best option is to improve your credit profile. Work to pay of your debt and other payments on time to improve your credit score and debt-to-income ratio.
Mortgage underwriting can be a confusing process, but by working with your lender and being a proactive borrower, you’ll be well on your way to home-ownership.