Understanding the Underwriting Process: A Behind-The-Scenes Look at Approving Home Loans
Buying a home or refinancing your existing mortgage can take you on a confusing journey that’s filled with acronyms and terms you’ve never heard before. You may suddenly hear terms like FHA loan, Conventional loan, LTV, DTI, fixed-rate, adjustable-rate, APR, MIP, rate lock, and many others and wonder what exactly they all mean.
(If you are confused about any of the terms above, click here to check out New American Funding’s mortgage glossary, which explains those terms and many more.)
Another term you may hear once you are in the mortgage process is underwriting. But the term isn’t as confusing or scary as it sounds. Let’s look into what exactly underwriting is and why it’s an important part of your mortgage journey.
What is underwriting?
To put it simply, underwriting is a process where a mortgage company examines your credit profile and determines whether you qualify for a mortgage loan.
After filling out your mortgage application, your Loan Officer prepares your loan file along with all supporting documents and sends it to the Underwriter who verifies that the information you provided to your Loan Officer is accurate.
During the process, the Underwriter will review your income, debts, assets, credit report and employment history. They will typically contact your employer to confirm your job title and salary. The goal is to make sure you will be able to pay the mortgage you are applying for.
How does an Underwriter make the mortgage decision?
To evaluate the risk of offering a borrower a loan, the Underwriter relies on program guidelines to make their decision and examines what are known as the 4 C's: capacity, capital, credit, and collateral.
Let’s look at each of those C’s briefly.
- Capacity is whether the borrower has the financial capacity to pay the mortgage based on their income and other expenses
- Capital means how much money the borrower has on hand
- Credit is how well the borrower has paid their previous financial obligations
- Collateral refers to the house in question. In a mortgage, the property is pledged as collateral for the loan.
One of the first questions the Underwriter will ask is does the borrower have the financial means to repay the mortgage? The underwriting team scrutinizes your debt-to-income ratio, which is how much of your monthly gross income goes towards paying your monthly debt and other accounts.
They also thoroughly review your creditworthiness to examine how you've handled prior debt obligations, things like a previous or current mortgage, credit cards, student loans, etc., to predict the likelihood that you'll repay the mortgage on time and in full.
About 10 years ago, the federal government passed new laws that require Underwriters verify ability to repay requirements are met before approving certain types of loans. Therefore, Underwriters may ask you more questions and request more documentation to make sure you have the ability to repay the loan back.
The Underwriter may inquire about inconsistencies in your application or gaps in employment. They may also ask for an explanation about derogatory credit accounts, a sizeable deposit on your bank statement, or a transfer of funds between accounts.
According to the Equal Credit Opportunity Act, there are some questions they can't ask you, such as the state of your health or if you plan to have more children. Even though some questions may seem intrusive, bear in mind that the main job of the Underwriter is to assess the borrower’s credit risk, ensure the borrower can pay the mortgage and ensure loan program guidelines are met.
How long does underwriting take?
The decision to approve or deny a loan application takes time. How much time varies on a case-by-case basis, depending on a borrower’s financial situation and questions that arise during the underwriting process.
Initially, the Loan Officer processes your application through an automatic underwriting system that aids in making the decision, but the Underwriter must still review and verify the loan documents meeting program guidelines.
Also, the accuracy of both the information you provided to the Loan Officer and the information the Loan Officer provided to the Underwriter factors into the length of the underwriting process. Inconsistent or conflicting information may lengthen the amount of time it takes for a file to go through the underwriting process.
Regardless of the Underwriter's questions, if you make yourself available and willing to answer questions completely and promptly, you will help move the loan process forward and move yourself closer to closing on your loan. Once an Underwriter considers all the above, they will come to a decision about whether your application for a mortgage loan is approved or not. And that is the underwriting process.
For more answers to your questions at every stage of your mortgage journey, reach out to our team of mortgage professionals today. We’re here to support you.