The Three Cs Of Mortgage Underwriting
- Capacity ability to repay the home loan
- Collateral value of the underlying asset
Now you may be wondering how underwriters determine the outcome of your mortgage application?
Well, there are the three Cs of underwriting, otherwise known as credit reputation, capacity, and collateral.
If youve had previous mortgage delinquencies or even non-housing related delinquencies, these will need to be taken into account.
Typically these items will be reflected in your three-digit credit score, which can actually eliminate you without any further underwriting necessary if you fall below a certain threshold.
Your history supporting significant amounts of debt is also important if the most youve ever financed has been a plasma TV, the underwriter may think twice about approving your six-figure loan application.
Capacity deals with a borrowers actual ability to repay a loan, using things like debt-to-income ratio, salary, cash reserves, loan program and more.
This covers whether the loan is interest-only, an adjustable-rate mortgage or a fixed-rate mortgage, cash-out refinance or simply rate and term.
The underwriter wants to know that you can repay the mortgage youre applying for before granting approval.
Finally, collateral deals with the borrowers down payment, loan-to-value ratio, property type, and property use, as the lender will be stuck with the home if the borrower fails to make timely mortgage payments.
Getting Started With Underwriting
When you begin the underwriting process, youll probably be quizzed right off the bat about any large deposits in your checking or saving accounts or how much of your 401 plan is vested. This is especially true if you’re planning on making a down payment of less than 20%. This is standard, so it’s nothing to be concerned about. But, be quick with your answers and any additional info. It will get the process moving.
Mortgage Underwriting: How Long It Takes And Everything Else You Need To Know
Are you a risky bet for a home loan? Your underwriter will help a lender decide whether or not to approve your application.
When buying a home, mortgage underwriters evaluate your risk level to help a lender decide if your application should be approved. The mortgage underwriting process happens behind the scenes after you submit a mortgage application. The underwriting decision will ultimately determine if you qualify for a home loan, so it’s helpful to understand the process, how to prepare and mistakes to avoid.
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How To Become A Mortgage Underwriter In 5 Steps
If you’re looking for a career field where you can use your strong analytical skills, you may be interested in becoming a mortgage underwriter. A mortgage underwriter is specifically responsible for assessing risk within the mortgage and real estate industries. If you have the skills and educational background, you can help people achieve their dreams of owning property. In this article, we discuss what a mortgage underwriter is and what their requirements are, provide five steps for how to become an underwriter, and explain what it’s like in their typical work environment.
Make An Offer On A Home
With your preapproval letter in hand, you’re ready to shop until you find the right house for your budget and lifestyle. When you do find the right home, you’ll make an offer for the sellers to review. Having a preapproval letter can increase your chances of getting an offer approved quickly. It makes you stand out as a serious buyer since you’re more likely to lock in financing.
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Top Reasons Underwriters Deny Mortgage Loans
Rejection hurts. And its even more upsetting when it gets in the way of buying your dream home.
Once you get your offer accepted, it may feel like theres nothing thatll stop you. But pump the brakes, just a bit. Theres one last hurdle youll need to go through. Its called the underwriting process, and its used to determine whether your loan application and your chances of buying the home you want will be accepted or rejected.
You may be wondering how often an underwriter denies a loan. According to mortgage data firm HSH.com, about 8% of mortgage applications are denied, though denial rates vary by location.
To avoid falling into that percentage of hopeful buyers, its important to understand how underwriting works, the top reasons why mortgage loans are denied in underwriting and some tips for preventing loan denial.
Collateralyour Down Payment And Home Value
To see the collateral risk of your mortgage, the underwriter needs to know the value of the home youre buying. They dont want to loan you a bunch of money for a house thats a piece of junk. Thats why the lender will always order an appraisal as part of the closing process.
Your underwriter also needs a property survey that includes the property lines of the land and the placement of the home on that property. Then theyll get a copy of the title insurance, which shows there are no liens, unpaid taxes or judgments on the property.
Last but not least, the underwriter considers your down payment. The bigger your down payment, the less risky the loan is to the lender. We recommend putting down at least 10% of the homes value, but 20% is even better! A down payment of 20% keeps you from having to pay private mortgage insurance , which lowers your overall payment for the life of the loan. Boo yah.
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Get Your Documents In Order
Make a checklist of all the documents youll need including W2s, tax returns, and bank statements so you can provide information the mortgage underwriter needs and respond to any queries quickly. You dont want to be frantically digging through desk drawers or searching folders on your laptop for files. Also, be ready to explain anything unflattering on your credit report, even if you have a very good score.
What Happens During The Underwriting Stage
There are several aspects to the underwriting process. The underwriter will review all documents to make sure they are complete. He or she will also perform some basic risk analysis. The goal here is to ensure that the borrower has the capacity to repay the loan, by looking at the borrowers current financial situation.
In fact, the capacity to repay the loan is one of the four Cs of mortgage underwriting:
- Capacity: Underwriters evaluate a mortgage applicants income, employment history, monthly debts and other factors to determine if the borrower has the ability to take on the monthly mortgage payments.
- Capital: In this context, capital refers to the borrowers liquid assets as well as savings, investments, etc.
- Collateral: In a typical mortgage lending scenario, the home being purchased serves as collateral for the loan. So the mortgage underwriter will need to know the value of the property, as determined by the home appraisal.
- Your credit history and score are another important factor during the mortgage underwriting process in New Jersey. Your credit scores and reports show how you have borrowed and repaid money in the past.
As you can see, underwriters have a lot of things to look at when they review a home loan application. Fortunately, our underwriters are highly skilled and efficient. So they can complete this process in a timely manner, which helps to keep everything on track.
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Fraud And Money Laundering Checks During The Mortgage Process
Research by the UKs leading fraud prevention service CIFAs, shows that fraudulent mortgage applications increased 5% in the first half of 2019 and that 45% of the fraudulent applications were from people aged between 31 and 40.
In fact, that same research found that 13% of adults in Great Britain think it is reasonable to exaggerate their income on a mortgage application.
Mistakes on a mortgage application, no matter how innocent, can be considered as mortgage fraud so its important that the information on your mortgage application is accurate and represents your current financial situation as openly as possible.
Inconsistencies in income, false information about your employment and even questionable payment references on your banking can all raise red flags for mortgage underwriters.
What Information Do I Need For Underwriting
Once you complete your loan application and we’ve provided you with a loan estimate, youll be asked to provide several documents including:
- A copy of your drivers license
- Last 2 years of W2 statements from your employer
- Last 30 days of pay stubs
- Last 2 months of bank statements
- Last quarter of stocks/bonds/mutual funds/401
and potentially more.
This is the information your underwriter will use to determine your loan eligibility. Your loan originator will also pull your credit report and provide that to the underwriting team as well.
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What Can You Do To Make The Process Easier And Faster
Things that slow down the process are either a lack of promptness from the buyer or a lack of communication from the lender on whats needed, Lerner says.
- Gather necessary paperwork. Start gathering bank statements, tax forms, and pay stubs during the house hunt for a truly expedited process. Respond promptly when your loan officer requests additional information for the underwriter.
- Confirm what systems your lenders will use to assess your application. You can ask your lender if it uses online systems to automatically verify your employment and assets, according to Matt Hackett, operations manager at Equity Now, based in New York City. If someone is technologically savvy, its easy to go on the lenders portal, he says. With authorization, we can order reports that oftentimes take the place of income documentation like pay stubs and W-2s.
- Keep in contact with your loan officer. Hackett also recommends keeping an open line of communication with your loan officer about employment, especially in the current economic environment. Lenders now check your job to see if its considered an essential service. If its not, they may do more frequent checks throughout underwriting to make sure you havent been furloughed or laid off.
As a home buyer, youre required to report a status change to your employment, Hackett says. But its easier if people are transparent and up front if they have any relevant information plus they feel more control of the process.
Property Valuations During The Mortgage Underwriting Process
Your chosen mortgage lender will also want to consider the type of property youre planning on purchasing and it may come as a surprise that certain types of buildings can lead to a mortgage underwriter declining the application on the basis that you might not be able to afford the repairs and maintenance of the property.
Its not just affordability for a certain property type thats considered, its the use of the property too.
For example, if you were to apply for a residential mortgage, which is usually charged at a lower rate of interest in comparison to a buy-to-let mortgage, but have a clear intention to let it out, that would likely lead to a rejection.
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Who Directly Interacts With The Underwriter
Usually the loan processor is the person who interfaces between the applicant and the underwriter. The loan processor is the one to receive the underwriter’s conditions that they then pass along to the would-be borrower. In conjunction, the appraiser that the lender works with is also communicating with the underwriter as the appraiser goes through the process of evaluating the home . Neither process is necessarily quick or seamless. If you’re jumping through hoops for your underwriter, take heart in the fact that the seller might be as well.
The Effect Of Turn Time
All mortgage lenders have a turn time. This is the time from submission for underwriter review to the final lender’s decision. The turn time can be affected by a number of factors big and small. Internal policy on how many loan operations the staff carries at one time is often the biggest factor. But, things as simple as the weather can throw off lender turn times quickly. For instance, if you live in a place where major blizzards are common in the winterthink Rochester, New Yorkyou should know that a big storm may delay the process.
Ask your loan officer what they expect your turn time will be and consider that factor in your choice of a lender. Keep in mind that purchase turn times should always be less than refinance turn times. Homebuyers have hard deadlines they must meet so they get first priority in the underwriting queue.
Normally, your purchase application should be underwritten within 72 hours of underwriting submission and within one week after you provide your fully completed documentation to your loan officer. This can take as long as a month, though, depending.
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Got Questions About Mortgage Underwriting Speak To An Expert
If youre looking for a mortgage and want to ensure you sail through the underwriting process, speak to a qualified and experienced mortgage advisor like those we work with can help.
Contact us on 0808 189 2301 or fill in our online enquiry form.
Well put you in touch with one of the experienced mortgage brokers we work with.
As well as helping you navigate the mortgage underwriting process, theyll be happy to answer any questions you have, source the right mortgage and find a suitable lender with the best rates too.
Ask a quick question
We know everyone’s circumstances are different, that’s why we work with mortgage brokers who are experts in all different mortgage subjects.Ask us a question and we’ll get the best expert to help.
Mortgage Underwriters Consider Layered Risk
- They dont look at one aspect of your borrower profile in a vacuum
- They consider all factors together to make a sound decision
- Those with risk in one area who are able to compensate for it
- May be approved, while those with risk in all areas might be denied
Now its important to understand that the three Cs are not independent of one another.
All three must be considered simultaneously to understand the level of layered risk that could be present in said loan application.
For example, if the borrower has a less-than-stellar credit score, limited asset reserves, and a minimal down payment, the risk layering could be deemed excessive, leading to denial.
This is the underwriters discretion, and can certainly be subjective based on other factors such as occupation, how long the borrower has been in the line of work, why the credit score is less than perfect, and so on.
The underwriter must decide, based on all the criteria, if the borrower is an acceptable risk for the mortgage lender, and if the end product can be resold without difficulty to investors.
Layered risk is a major reason why the mortgage crisis got so out of hand. Scores of borrowers applied for mortgages with stated income and zero down financing, which is certainly very high risk, and were easily approved.
Rising home prices covered up the mess for a while, but it didnt take long for everything to unravel. This is why sound mortgage underwriting is so critical to a healthy housing market.
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What Do Mortgage Underwriters Look For
- Proof of income. The first thing a lender will look for is a regular source of income. If possible, this should arrive in your bank on the same day each month and it should be the same amount. While you might think an increase in income is a good thing, fluctuating income is seen as a sign of financial instability. This is particularly true for the self-employed who may have different income levels every month.
- Regular savings. Transferring money to a savings account can also make you look like a responsible borrower. However, dipping into your savings for small amounts could have the opposite impact.
- Responsible overdraft use. An overdraft is considered a good thing, provided you are using it correctly. Your salary should bring you above your overdraft every month, and you should never exceed your agreed amount. Bank charges outside of your overdraft interest could be considered a bad thing.
The Underwriter Will Make An Informed Decision
The underwriter has the option to either approve, deny or pend your mortgage loan application.
- Approved: You may get a clear to close right away. If so, it means theres nothing more you need to provide. You and the lender can schedule your closing. However, if your approval comes with conditions, youll need to provide something more, such as a signature, tax forms or prior pay stubs. The process may take a little longer, but nothing to worry about if youre prompt in responding to any requests.
- Denied: If an underwriter denies your mortgage application, youll need to understand why before deciding on next steps. There are many reasons for the denial of an application. Having too much debt, a low or not being eligible for a particular loan type are some examples. Once you know the reason for the decision you can take steps to address the issue.
- If you dont provide enough information for the underwriter to do a thorough evaluation, they may suspend your application. For example, if they can’t verify your employment or income. It doesnt mean you cant get the loan, but youll need to provide further documentation for them to decide.
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What Do Mortgage Underwriters Look For On Bank Statements
When looking at a bank statement, a mortgage underwriter is trying to figure out what borrowers mortgage affordability could be.
Mortgage lenders will usually request at least 3 months worth of bank statements before they make a mortgage offer but usually, after you have received a mortgage in principle. It is the mortgage underwriters job to look at these bank statements and make a determination on if the borrowers s eligible for a product the mortgage lender offers.
The bank statements will allow the mortgage lender to carry out a deep dive on your finances and ensure you meet their eligibility requirements.
Mortgage underwriters will have a firm list of things which they check for but they could also spot other things which stick out to them and these could affect your mortgage affordability.