Q:What happens when a mortgage goes to underwriting?
A:When a mortgage goes to underwriting, it means that the loan is being reviewed to see if the borrower(s) qualify for the mortgage. An underwriter will review the documentation that is relevant to the mortgage approval. These documents may included the application, income, assets, appraisal, purchase agreement, title, credit report, and more.
Based on a review of this documentation, the underwriter will decide whether to approve or deny the loan based on the mortgage lender’s guidelines. If the underwriter is unable to make a loan decision from the documentation that they have been provided, they will condition (request) for the additional required documentation.
Many people that wish to obtain a mortgage will work with a loan officer who is the middleman between the borrower and lender. The loan officer or the processor will collect the loan documentation from the borrower and submit it to underwriting for review. The loan officer will work with the underwriter to try to get the loan approved.
Below are some of the things that an underwriter may review for the loan decision. Note that there may be additional documentation that may be required beyond what is discussed below.
The underwriter will review your credit report and evaluate things like your record of timely payments, number of trade-lines, type of credit used, credit scores, etc. The better your credit score, the better chance of obtaining a mortgage and a favorable interest rate. However, credit is only one factor of many that is considered for a loan approval.
You will likely have difficulty getting a mortgage with recent derogatory credit such as a foreclosure or bankruptcy. Lenders do not expect their borrowers to have perfect credit, but they typically want to see a pattern of good credit behavior.
You need to show lenders that you have the ability to pay your mortgage. The underwriter will review your income documentation such as pay stubs, tax returns, social security award letters, or whatever other source of income documentation you may have. Once your income is calculated, the underwriter can then calculate your debt-to-income ratio. This is your total debts (including the new mortgage payment) divided by your total income. The underwriter uses this ratio to evaluate your ability to pay the mortgage. Generally, you need a 43% debt-to-income ratio or below, but there are some exceptions. A debt-to-income ratio of 35% below is considered good.
Verification of Employment
Underwriters are commonly required to perform a verification of employment (VOE). The underwriter will call your employer and ask to speak with human resource or a similar department. They will verify your dates of employment and current position. The VOE is typically performed very close to the closing to verify that the borrower is still actively employed.
Many times you will need to bring cash to close a loan to the mortgage closing. The lender will verify that you have sufficient funds in a bank account or other asset account to cover this cash to close. Additionally, some loans may require that you have verified reserves. If required, the lender will also confirm you have the required reserves in an account. Be aware that the underwriter will request the source of any unknown large deposit to verify it came from an acceptable source.
The appraisal is important to the underwriter because it is used to indicate the value and to determine how much the lender can loan out to the borrower. The underwriter will review the appraisal to verify that the value represented on the appraisal is supported by the comparable sales provided. They look to see if there are an noticeable issues with the property noted in the appraisal or displayed in the photos. If there are any discrepancy, the underwriter will request that the appraiser address these issues in a revised report.
The Underwriting Decision
After the underwriter reviews all of your loan documentation they will make a decision on whether to approve or deny your loan. Most lenders have an automated system that is customized to the lenders guidelines. The underwriter enters all the borrowers loan information into a computer program and the program indicates whether to approve or deny based on what was entered.
If your loan happens to be denied, your lender will communicate the reason to you. Just because a loan is denied does not necessarily mean all is lost. The mortgage professional you are working with may be able to rework the loan and resubmit it back to underwriting for review if there are options available.