Underwriting is the structured process by which financial institutions like banks and lenders determine and price the risk posed by potential borrowers in repaying a mortgage loan. Essentially, it is a systematic and detailed analysis of a borrower’s creditworthiness. The mortgage underwriting process consists of many stages from information gathering to approval. It is an underwriter that has the final say in whether your mortgage loan is approved or not. They come to this conclusion by employing various means to assess a borrower’s risk and their ability to pay their debts.
Below are the steps that underwriters commonly follow:
Underwriters evaluate the risk a borrower presents by analyzing their personal information, financial investments, credit reports, tax returns, residential histories, income level, employment records, debts, bank statements, pay checks, and any other relevant documents. The document collection stage is imperative to the entire mortgage underwriting process as without the right information the application is deemed incomplete and cannot be processed. Instead, it will be denied right off the bat.
Once the documents are collected, the underwriter begins to process them by officially verifying the information contained in the documents for preapproval. This information can either be verified manually or electronically by way of algorithms or other computerized systems. Not only will debts and payment histories be cross-checked with the bank, credit reports may also be cross-verified to determine how financial stable the borrower has been and will presumably continue to be once the mortgage loan is approved.
Collateral, Credit, and Capacity
It is also important to analyze the borrower’s ability to repay the loan based on their capacity (income or assets), credit (payment record or credit history), and collateral (home value and down payment). This is because the lender or bank needs to minimize their risk of being exposed to a borrower defaulting on a loan after the mortgage loan underwriting process has been completed. To prevent such cases from occurring, lenders resort to evaluating income, payment histories, and property value’s with increased scrutiny. If there are any doubts as to whether the borrower may face difficulties in repaying the loan, lenders must investigate that risk further.
After the documents are verified for authenticity and the preapproval letter is generated, a title search is ordered. This is to ensure that the house does not have any legal claims against it and can be securely transferred to the new homeowners. It is the title company’s job to research and identify any liens, unpaid HOA dues, pending legal actions, judgements, and unpaid taxes for the property’s entire history. This information can either be verified manually or electronically by way of algorithms or other computerized systems. The title company is also responsible for purchasing an insurance policy on the title to guarantee the accuracy of the research they carried out. In some cases, it is normal to have two policies issued – one to protect the property owner and another to protect the lender.
Once the title insurance is issued, the lender or bank will order an appraisal of the property in question. This appraisal is conducted so that the financial institution does not lend out more money than what the property is currently worth. This appraisal is responsible for setting the home’s market value. The lender will also use the appraisal to calculate the loan-to-value ratio. At this time, a property inspection is also ordered to ensure that the property is in good condition and can be underwritten without any complications.
After this entire mortgage underwriting process is completed, the best outcome is loan approval. However, several other decisions may also be rendered. The mortgage underwriting process consists of many stages from information gathering to approval. Should your mortgage application be denied, you may reapply in a few months once you address the key areas that resulted in the denial in the first place. The application may also be suspended, which means key information was missing in your application. Finally, your application could be approved with conditions, where you will be required to provide additional evidence to support your application to secure your mortgage.
Although underwriting can be quite time-consuming, it is the most important step for ensuring that both lenders and borrowers minimize their risks in engaging in high-stakes transactions.