Understanding the Underwriting Process: A Behind-The-Scenes Look at Approving Home Loans
- posted 12.13.2016
- Rachel Scott
- Home Loans
Once you have spent time finding the home you love, it's important to keep in mind that it will take some time before homeownership is a reality. House hunting begins the journey but the home-buying process is another step-by-step procedure. Even after a preapproval, it doesn't guarantee an immediate loan because from the point your application is approved until it closes, there is a lot of work happening behind the scenes in a crucial part of the loan approval process known as underwriting.
The Underwriting Process
After filling out your mortgage application, the Loan Officer organizes your file along with all supporting documents and sends it off to the Underwriter, who acts somewhat like a home mortgage detective because he or she verifies that the information you provided your Loan Officer is accurate. It is up to the underwriting team to investigate your income, debts, and employment history. They will typically contact your employer to confirm your job title and salary. The goal is to make sure a prospective borrower doesn't provide any information that could ultimately pose a risk to the lender.
The 4 C's
As a result, the Underwriter becomes like a gatekeeper for the lender and doesn't grant a potential borrower access to home loan approval unless the applicant demonstrates he or she is a suitable investment. In order to evaluate the risk of offering a borrower a loan, the Underwriter relies on set guidelines to make his or her decision and examines the 4 C's: capacity, capital, credit, and collateral. One of the first questions the Underwriter will ask is do you have the financial means to repay the mortgage? The underwriting team, scrutinizes your debt-to-income ratio, the state of your savings, and IRA or other accounts in order to reach a decision. They want to make sure that if you lose your job or become ill that you still have the capacity to meet the loan conditions. They also thoroughly review your creditworthiness to examine how you've handled prior debt and to predict the likelihood that you'll repay the mortgage on time and in full.
In the early 2000s, the Consumer Finance Protection Bureau began requiring Underwriters to meet higher standards and to do more fact checking before putting a stamp of approval on a loan. Therefore, Underwriters ask you more questions in order to make sure your financial profile meets the loan conditions. The underwriting team will typically inquire about inconsistencies in your application or gaps in employment. They may ask for an explanation about a decrease in your credit score, a maxed out credit card, sizeable deposit, or a transfer of funds between accounts. According to the Equal Credit Opportunity Act, there are some questions they can't ask about 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 protect the lender from a borrower who poses a high risk of defaulting on the loan.
To properly make a determination to approve or deny a request, it takes time, which varies on a case-by-case basis depending on your financial situation and questions that arise during the underwriting process. Initially, the Loan Officer processes your application through an automatic underwriting system but often, it's necessary for additional manual underwriting which requires more time. Also, whether or not your Loan Officer provided the Underwriter with a clean file that has all the necessary information on the front end will factor into the length of the underwriting process. One key component to shortening the process is accuracy.
Regardless of the Underwriter's query, if you make yourself available and willing to answer questions completely and promptly, you'll move the loan process steadily forward and move yourself closer to funding.