Lenders will never approve a mortgage without first conducting their own due diligence in the form of underwriting. A mortgage underwriter reviews, confirms, and analyzes loan applications to minimize the risk associated with the loan. While some mortgage applications receive a stamp of approval the first go around, many more face suspensions and denials that can prolong the mortgage approval process for weeks or months.
Mortgage lenders set their own underwriting based on risk tolerance. In general, larger mortgage companies can accept a higher level of risk than smaller companies and may offer a more diverse range of loan products. The underwriting process begins as soon as a borrower files a completed application with his or her lender.
A mortgage underwriter will scrutinize the filed application for errors, inconsistencies, and potential risk factors. He or she may contact the applicant’s employer, confirm credit reports, research assets and liabilities, reconcile risks, and determine if the contents of the application fall under company approval guidelines. Underwriters may use various software programs, formulas, and research databases to fulfill required underwriting duties.
Upon the completion of the process, the underwriter will approve, suspend, or deny the application and send it back to a mortgage officer for borrower notification. The underwriting process generally takes no longer than a week. If approved, the borrower can meet any additional conditions and move forward with the closing process. If suspended, the application may hang in limbo until the borrower clears the suspension. If denied, a borrower may need to either correct an error on the mortgage or start the process over with a different mortgage product or lender.
Some mortgage applications move from the initial filing to approval without any clarifications or corrections. Others contain issues that complicate the underwriting process. Issues range from small typos and omissions to major credit concerns. They generally fall under three broad categories – credit, capacity, and collateral. Consider some of the most common issues a mortgage underwriter may see in an application:
1. Missing information. An underwriter needs to know the applicant provided a complete set of information before he or she can dive into the details. Many loan officers check applications before sending them to the underwriting team, but omissions can and do slip through the cracks. A missing signature, document, or figure can prevent an underwriter from moving forward with part or all of the underwriting process. A completed application is a must-have for a formal (vs. preliminary) loan approval.
2. Income discrepancies. Some borrowers fraudulently attempt to pad income information in an effort to secure an approval. Underwriters must carefully compare income levels on tax returns, W-2s, bank statements, and other documents to determine the borrower’s true income. Many professionals also use websites such as Salary.com to confirm accurate income levels and protect their employers from risk.
3. Tax document discrepancies. Like income documents, tax documents must back up other financial information for a mortgage underwriter to approve the loan. Misstated information can raise red flags. Many borrowers don’t realize that they can’t use their gross income on a mortgage application. Lenders look at an adjusted gross income (AGI) or taxable income to assess risk.
4. Employment issues. Stability is key for the mortgage approval process. Mortgage underwriters need to see a long-term commitment to confirm a borrower’s capacity to repay the loan. They may struggle to make a capacity assessment if a borrower cannot demonstrate consistent income over a period of two or more years or if a borrower has recently become self-employed. Underwriters often have to make situational judgment calls to approve or deny a borrower who barely meets or misses employment requirements. They often appreciate explanation letters explaining the situation.
5. Credit issues. Credit issues create major roadblocks for mortgage applicants. An application may appear to meet all lending requirements until the underwriter starts to confirm the borrower’s credit history with credit bureaus and creditors. A history of late payments, too many lines of credit, and high balances can all hurt a borrower’s mortgage application. Underwriters cannot approve applicants who do not meet minimum credit requirements.
6. Funding issues. An underwriter needs to see clear evidence of funds for the down payment, closing costs, and cash reserves. Many mortgage underwriters run into problems with a borrower’s ability to meet upfront funding requirements. They need to know the source of funds, how long the funds have been available, and from where they originated. Too many borrowers fail to provide the transparent funding information underwriters need to approve loans.
7. Appraisals. Occasionally, a problem arises with the property appraisal rather than the borrower’s application. A low appraisal value can change the nature of the entire mortgage agreement. Without price reconciliation among buyers and sellers, underwriters may have no choice but to deny the application.
8. Gray areas. Some issues fall clearly into the approval or denial categories while others lie in gray areas. When outstanding circumstances, complex asset arrangements, and other unexpected issues arise, underwriters must rely on their expertise and experience to assess risk and protect the lending institution from undue risk.
Letters of Explanation frequently come in handy during the underwriting process. Underwriting professionals can use them to better understand a borrower’s personal situation and make an informed application decision.
As regulations in the mortgage industry evolve, underwriters continue to play a crucial role in the home purchasing process. They have the power to approve, delay, or deny an application. While underwriters may feel personally sensitive toward an applicant’s situation, they must rely on the findings of their risk assessments. One bad decision can lead to hundreds of thousands of dollars in losses.
Borrowers who understand the most common issues mortgage underwriters face can take steps to avoid them. Strong financial organization skills, Letters of Explanation, and a quick proof of the application can all reduce the likelihood of an unexpected application suspension or denial.
These and other mortgage application issues are routine for underwriters. They have the expertise, tools, and clear guidelines that enable them to make low risk decisions on loan applications. Whenever more complex matters arise, underwriters rely on industry best practices to make judgment calls that will serve the lender and the borrower well.
