The application process to get a mortgage may seem a little daunting with all the information you reveal. But just because you get through the application doesn’t mean it’s over, and you will magically get your loan.
There’s another step that many people don’t even realize. It’s called the underwriting stage. An underwriter is the person who gets the application from the loan processor. It is the underwriter’s job to assess if you are eligible for the mortgage loan you are applying for, states Freddie Mac’s Your Step-by-Step Mortgage Guide. It is the process that your lender uses to assess your eligibility to receive a mortgage loan.
What is underwriting?
Underwriting involves the evaluation of your ability to repay the mortgage loan. An underwriter will approve or reject your mortgage loan application based on your credit history, employment history, assets, debts and other factors. It’s all about whether that underwriter feels you can repay the loan that you want.
During this stage of the loan process, a lot of common problems can crop up. Some of those problems could actually delay your loan from closing or even stop it from ever happening.
“The moral of the story comes down to how complete the story is by the consumer. The consumer can absolutely help the process by being as concise and complete in the information at the point of the application,” says Dustin Wells, senior vice president of the retail mortgage at International Bank of Commerce, Laredo, Texas.
He feels sometimes that many consumers don’t understand how critical all the moving parts of an application are. But a seasoned loan originator is an integral part of the whole process, he says.
“They know what questions to ask. They work with consumers every step of the way in completing the application so that the consumer doesn’t miss something along the way,” he says.
Once the application is handed in, the underwriter uses the 3 C’s of underwriting — credit reputation, capacity, and collateral – to figure out if the application will lead to a loan.
“If one of these components is not acceptable or if there is an excessive layering of risk across components, the mortgage may not be acceptable for sale to Freddie Mac,” the Freddie Mac Single-Family Seller/Servicer Guide.
Credit reputation refers to credit score, collections, credit accounts, bankruptcies, etc. Capacity is the debt ratios, cash reserves, number of borrowers, loan characteristics such as a 15-year fixed, and whether someone is salaried or self-employed. Collateral includes the borrower’s total equity or down payment, and the property type and use that the borrower is buying.
“Underwriting is the process in which an individual goes through and validates and confirms information provided by the consumer,” Wells says.
Common underwriting problems
Some of the areas that pop up during the underwriting process that can cause problems, he says, include:
Assets – A customer might not disclose everything they have such as all of their 401K accounts or their two different bank accounts. “They aren’t using all of those assets for qualifications,” Wells says. “However, with the new regulatory climate and rules, underwriters are looking at all of those pieces. They are looking through a prism. An average consumer doesn’t do it to be deceptive. They just didn’t realize how much they should reveal.”
Employment – The importance of a 24-month history of employment is very important in the loan approval world. If someone has been self-employed for less than two years and only has had a business license for 18 months, that could be a problem. They won’t have two years of tax returns that show what they have been up to. Every lender is different, and sometimes all it takes is a letter of explanation from the borrower about their employment status, Wells says.
Tax Deductions – Your CPA prepared your taxes, and you were well in your rights to claim all of those deductions. “But I can’t add all those pieces back into your application for you to make it look like you made more income. Your tax return is what you claim to make, and so I can’t give you the benefit of all of those deducted items,” Wells says.
Credit History – A seasoned loan originator will examine your credit history and ask you to explain some of the disputes or red flags that jump out at him/her. But if you are doing the application on your own or with someone not as seasoned, things could fall through the cracks causing you problems later on. “If these problems aren’t fixed on the front end, it becomes a pitfall for the consumer and very frustrating,” he says.
Source of funds – Your mother will be giving you the $20,000 for your down payment. But you don’t reveal where your mother is getting the money from, Wells says. “We need to make sure that your mother has the funds to provide the gift. We always have to substantiate where the money comes from. Did your mother cash in some stock, take it from her retirement fund, or what?” The average customer doesn’t know that underwriters need to have that information.