Once you submit a mortgage application, it goes into underwriting. But what does underwriting mean?<\/p>\n
Mortgage underwriters examine your application and documents to approve or decline your application
\nComputers can approve mortgages, but human underwriters must verify that your documents match the information on your application
\nUnderwriters usually require proof of your income and assets and may have additional requests
\nYour approval is usually subject to conditions. These conditions can range from bank statements to tax returns to explanations about your credit. All conditions must be in and approved before you can close.<\/p>\n
You begin the application process by working with a loan officer or loan processor. He or she takes your information and completes a mortgage loan application.<\/p>\n
Your loan officer reviews the Loan Estimate (LE) form and other disclosures with you, answers your questions about the forms, and tells you what you need to provide to secure your mortgage approval.<\/p>\n
Underwriters check a borrower\u2019s \u201cthree Cs.\u201d That\u2019s character, collateral and capacity. In other words, your credit rating, income and the property value.<\/p>\n
In most cases, your loan officer or processor submits your application electronically to an automated underwriting system (AUS). The program generates a recommendation and a list of conditions, which you must meet in order to finalize your approval. (Fannie Mae\u2019s Desktop Underwriting system\u2019s results include \u201capprove,\u201d \u201crefer,\u201d or \u201crefer with caution.\u201d)<\/p>\n
If you get a \u201crefer\u201d response, a human underwriter must take a second look and perhaps underwrite your loan manually. \u201cRefer with caution\u201d usually means that the system declined your application.<\/p>\n
If you get an \u201capprove\u201d response, the system kicks out a list of conditions you must meet to finalize your approval. Your loan officer will help you get these things, and a human underwriter will make sure that the documents you provide match the information on your loan application.<\/p>\n
Mortgage underwriter checklist
\nA primary role of the underwriter is to approve loans that will perform and limit risk. That means carefully examining a borrower\u2019s entire loan profile. Typical tasks include<\/p>\n
Examining credit history. Your credit history is one of the most important factors in the loan approval process. Underwriters analyze your credit history because of the way you managed debt in the past is a good predictor of how you will handle your mortgage obligation. Late payments or collections will require additional documentation.<\/p>\n
Verifying employment and income. Underwriters verify your employment history to make sure your income is stable. They may call your employer to make sure you work there and will review your last two years\u2019 W-2s or tax returns. Underwriting systems also compare your income and debts, calculating what\u2019s called a debt-to-income ratio, or DTI.<\/p>\n
Check home appraisal. A licensed home appraiser compares the property to nearby, similar homes, and establishes its market value. Underwriters examine the appraisal to make sure the appraiser followed the lender\u2019s guidelines and made accurate adjustments to arrive at the value given to your home.<\/p>\n
Verify asset information. Your down payment is a very important factor and underwriters scrutinize it carefully. Did it come from your own funds? Or does your last checking account statement contain some weirdly huge deposit? They\u2019ll quiz you and ask for more documents, in that case, to make sure that the down payment was not borrowed or furnished by someone who benefits from the sale, like the seller or real estate agent.<\/p>\n
Automated underwriting
\nMost banks and mortgage lenders use Automated Underwriting Systems (AUS). They are sophisticated software systems that render preliminary underwriting decisions.<\/p>\n
The system lets the human underwriter know if a mortgage applicant meets the lender\u2019s guidelines, based on information from the loan application and credit reports.<\/p>\n
Fannie Mae\u2019s version of automated underwriting is DU (Desktop Underwriter), and Freddie Mac\u2019s is LP (Loan Prospector).<\/p>\n
Once a loan officer or processor submits an application, the AUS reports its findings and generates conditions. Usually, conditions simply involve proving that what was input on the application is true \u2014 bank statements and pay stubs, for instance, to verify the income and assets stated on the application.<\/p>\n
Most mortgage lenders do some manual underwriting of mortgage applications. Usually, that\u2019s because the applicant has an insufficient credit history or the credit report has been compromised by identity theft. Unusual mortgages or very large loans are also frequently underwritten manually.<\/p>\n
Most lenders that fund mainstream programs use a combination of automated and manual underwriting to complete a mortgage decision.<\/p>\n
\u201cApproved with conditions\u201d
\nThere are a number of stages in getting a mortgage loan. Your first step is mortgage pre-qualification. And then you\u2019ll complete an application and submit it for mortgage pre-approval. After your loan comes out of underwriting, the goal is to have your loan approved with conditions.<\/p>\n
Don\u2019t be fearful when your lender tells you your approval has conditions. A conditional loan approval is fairly standard. Satisfying the loan conditions, whatever they may be, is how you turn your conditional loan approval into a full\/final approval.<\/p>\n
Underwriting conditions can vary according to the type of loan for which you\u2019ve applied, your employment, income and overall credit profile. The way you or your lender complete the mortgage application can influence your approval and the conditions you must meet.<\/p>\n
Final approval
\nExamples of underwriting conditions could include anything from documentation of proper homeowners insurance to letters of explanation for certain items in question with your loan file.<\/p>\n
And some conditions can trigger a request for additional ones. For instance, your pay stub contains a deduction for child support that you didn\u2019t put on your application. Now you\u2019ll need to provide your divorce decree.<\/p>\n
The best thing you can do as a soon-to-be homeowner is to respond promptly to your loan officer\u2019s requests. It\u2019s also important to understand not to shoot the messenger here.<\/p>\n
Your loan officer is your liaison between you and the underwriter. If you don\u2019t understand or can\u2019t comply with a condition, he or she may be able to help you find a way around it and get your loan closed. Remember that the lender employees are ultimately on your side and doing their best to help you close your loan on time.<\/p>\n