- Risk analysis
- Loan requirement verification
- Loan document assessment
- Decision time
Step 1: Risk analysisThis usually raises one of the most common questions asked about the mortgage underwriting process: What is an underwriter? Underwriters are risk-takers. Of course, you probably won't find them shark diving off the Farallon Islands or base jumping from Salesforce Tower. But, when it comes to the mortgage underwriting process, mortgage underwriters are the Evel Knievel of the lending industry. Underwriters are financial experts employed by lending companies. An underwriter is ultimately the one who decides if you qualify for a mortgage based on their review and assessment of financial information. It's the job of the underwriter to determine if offering a loan to an applicant is risky business. Then, they decide how much risk they're willing to take based on an individual's financial profile. To evaluate how much (or how little) risk an applicant presents, underwriters look at the three Cs: credit, capacity and collateral.
CreditWhen an underwriter looks at a credit report, they're looking at the current credit score and the overall credit history. Although not the sole determining factor, credit carries a lot of weight in the loan application decision. Some of the potential red flags underwriters look for:
- Late payments on credit cards
- Mortgage payment delinquencies
- Foreclosures or property liens
- Current collections or recent charge-offs
- Number of new credit requests in the past year
CapacityPart of a mortgage underwriter's risk assessment involves scrutinizing a loan applicant's financial situation. The underwriter evaluates your ability to make the anticipated monthly mortgage payments. The documents requested by your loan officer are used for this. They'll begin the risk analysis by checking income and employment, assets and liabilities. Income is confirmed using pay stubs and tax returns. Then, your income is compared to your monthly debt and other financial responsibilities. This is referred to as your debt-to-income ratio (DTI).
CollateralRisk evaluation also involves making sure the property is worth the loan amount requested. This is referred to as LTV (loan-to-value). Like the HELOC application approval process, the appraisal ordered by your loan officer provides an estimated property value. This is based on current real estate benchmarks in the local area. This ensures the property you plan to purchase is acceptable collateral toward the mortgage loan, in the case of default.
Step 2: Loan requirement verificationIt's at this time that the underwriter may request additional documentation. Most types of loans have similar standard requirements. But there are certain types of loans (FHA, Fannie Mae, Freddie Mac and cash-out refinance, for instance) that require additional documentation. It is the job of the underwriter to make sure the person applying for the loan (and the property they're interested in purchasing) meet all loan requirements.
How long does the underwriting process take?The amount of time it takes for the underwriting process varies. It can take as little as a couple of days or may extend to several weeks. One issue that can lengthen the time frame is loan file incompleteness. To avoid delays, be thorough when providing documentation upfront. And be quick to respond to additional requests for information.
Step 3: Loan document assessmentThere's a long list of documents a home buyer must provide during the mortgage process. The underwriter determines if all required documentation has been supplied in the loan file. They'll also verify accuracy. They examine the documents that were required during the application process:
- Bank statements
- Pay stubs
- Tax returns
- Credit history
- Current credit report
- Assets and debts