A Guide to the Mortgage Underwriting Process
What is mortgage underwriting?
Mortgage underwriting is the process used by lenderâ€™s to determine if the risk involved in offering a mortgage loan to a borrower is acceptable. Following specific guidelines involving a borrowerâ€™s credit, collateral and capacity, a mortgage underwriter will ultimately decide whether or not said borrower qualifies for loan approval.
The role of a mortgage underwriter
To better understand the process of a mortgage underwriter, it is important to know what their role entails.
A mortgage underwriter works alongside the loan processor and mortgage banker to ensure that the borrower is not overextending their budget. To approve or deny a loan, an underwriter cre-ates an in-depth analysis of the loan package. This is used to determine if a potential borrower presents an appropriate amount of risk. An underwriter is the best judge for reviewing applica-tions, as they are experts in the lenderâ€™s policies and procedures. Furthermore, a mortgage un-derwriter will assess the risks for both the borrower and the lender. Risks for the lender can in-clude:
- Interest rate risk: The risk that can result from fluctuating interest rates.
- Default risk: The risk that occurs when a borrower is unable to make payments on their debt obligations.
- Pre-payment risk: The risk that a borrower may pay off their loan before maturity, and there-fore no longer be required to make interest payments, depriving the lender.
Breaking down the mortgage underwriting process
During the verification portion of the loan approval process, an underwriter will review the infor-mation provided on a borrowerâ€™s application and analyze all supporting documents. The amount of verification that occurs varies from borrower to borrower. If the lender perceives a borrower to be high risk, a much more detailed verification process will take place.
Throughout the verification, credit reports will be pulled and incomes will be analyzed. The credit reportâ€” pulled from all three credit bureaus: Equifax, Transunion and Experianâ€” will be used to determine a credit score and demonstrate how well a borrower manages their current debt.
An income analysis will also be conducted. To accurately indicate whether or not a borrower will be able to make payments on their loan, mortgage underwriterâ€™s will take an in-depth look at a borrowerâ€™s employment, income, assets and current debt. Because there are various types of income, documentation provided for each will vary. A borrower who earns an hourly wage, for example, will need to supply pay stubs and W-2 statements, while a retiree will need to prove their eligibility for social security and document the receipt of payments.
Using a borrowerâ€™s debt-to-income ratio, underwriterâ€™s will determine a borrowerâ€™s ability to pay the loan. Debt-to-income ratio is calculated using the following formula:
An individualâ€™s assets are also taken into consideration during the verification process. The most common types are savings and checking accounts, as well as retirement funds and investments like mutual funds or stocks. Statistically, borrowerâ€™s who have a great amount of liquid assets are less likely to default on their mortgage.
As a borrower, one may feel helpless during the verification process, but there are things a bor-rower can do to assist the lender, like providing all documentation at the time of application or providing more information to the lender when requested. At the same time, a borrower should keep records of all interactions with the lender.
In order to measure that the value of a borrowerâ€™s property is comparable to that of similar prop-erties, a licensed appraiser will provide the lender with an estimated value. This value will be based on both physical inspection and comparableâ€™sâ€” the result of which could ultimately affect the rates and terms of a borrowerâ€™s mortgage.
Title Search Process
No lender wants to lend money against a home that has a negative legal history. To avoid such situation, a title company will evaluate the home for the following burdens such as unpaid taxes, claims, mortgages, zoning ordinances, easement rights, pending legal action, etc. For this rea-son, a lender will require title policies to protect themselves and the property owner.
Collateral refers to property type, property use and value. Taken into consideration during the mortgage loan process is the borrowerâ€™s down payment or total equity, the property type, and what the property will be used for (primary residence, investment property, second home).
Simplifying the mortgage process
The underwriting process is a crucial step in a borrowerâ€™s journey to loan approval. Not only does the loan approval process protect the lender, but it also ensures that the borrower is not making a financial mistake.
The mortgage loan process isnâ€™t always a simple one, but at RP Funding, we strive to make it as easy as possible for everyone. With zero lender fees and easy on-time processing, we guarantee the best deals. RP Funding understands that time is money, which is why we offer a 10-day closing acceleration program and no closing cost refinancing. To learn more about how RP Funding can help you, Click Here to Apply Now.
Related Video to the Mortgage Loan Underwriting Process
With interactive and full text script. By Robert Palmer
Click me to view the Full Transcript
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- Good morning and welcome to today's addition of Saving Thousands. You know, there's nothing worse than getting pre-approved for a home loan, then finding the home of your dreams, only to get declined by the lender during the underwriting process. Today we'll look at the most common causes of this scenario and how you can avoid this hassle and heartbreak.
The mortgage credit underwriting process is unavoidably complex due to the level of due diligence required in lending such large sums of money. And unfortunately, no amount of explanation can fully simplify this process. Making things more difficult is that mortgage lending is an industry where regulatory guidelines are continually changing and adding new stipulations. Well, I'm here to shed some light on the inner workings of the credit decision process. And with a little bit of planning and setting the right expectations, you can make it through.
Let's begin with looking at the person responsible for putting the lender stamp of approval on the loan, the underwriter. A mortgage underwriter is a credit analyst. And ultimately they approve or deny your credit request. He or she uses a process called layering where they assess the total risk by reviewing all the different factors to determine your credit worthiness. This layering process allows an underwriter to identify several key factors that consistently surface as red flags for risky loans.
Keep in mind, underwriters are human beings. And they're trying to make a responsible lending decision which will not only be in the best interest of the lender, but also you as the consumer. Much of this process is heavily controlled by rules and regulations. But some items are subjective and therefore open to interpretation.
In the end, the rules control much of the process and contribute to the complexity. But there are steps you can take as a consumer to make sure your mortgage application stays approved after you've been issued that pre-approval notice. I'm going to go over the biggest mistakes potential homebuyers make. These mistakes can cost prospective homeowners to be turned down, even after receiving an initial pre-approval notice. So let's jump right in.
Number one, failing to disclose past bankruptcy, foreclosure, or short sale. There are credit repair companies out there who claim they can remove these items from your credit report. Or in some cases, because of errors at the credit bureau, they may just not appear correctly. Unfortunately, if you don't tell your lender about a past bankruptcy, short sale, or foreclosure, you may think you're pulling a fast one when you get pre-approved. But in the end, the lender will almost always find these items.
Most lenders utilize independent verification of these things in addition to the credit report. These additional fraud checks can sometimes take weeks to perform, leading to last minute discovery and denial of your loan application. The more honest you are with the lender, the better chance you have of staying approved and closing on your new home. Some other important aspects to disclose are if you included a home in the past bankruptcy or if you reaffirmed the home after the bankruptcy. Reaffirming means that you made an agreement to remove the home from the bankruptcy and begin making payments again. Again, these can lead to last minute discoveries by the lender that void your pre-approval and cause your application to be denied.
Number two, unreimbursed business expenses on your tax returns. Some borrowers work jobs where they're required to drive significant mileage for work or purchase their own uniforms or travel on their own dime. If you have these items on your tax returns, they must be deducted from your qualifying income.
Most lenders do not require tax returns from borrowers upfront and instead discover these added expenses during the underwriting process. Lenders will obtain a copy of your tax returns directly from the IRS to make sure that borrowers are telling the truth on their application. Some borrowers don't even realize that their accountant is taking these deductions.
So if you're thinking about purchasing a home, take out your tax returns and look at Schedule A, Line 21 called unreimbursed employee expenses, job travel, union dues, job education, et cetera. If you have a loss there, let your lender know because this will be deducted from your income and could cause you to no longer qualify for the home loan. To calculate your income, the lender will take the amount you earn yearly and deduct the entire amount of these expenses.
Number three, undisclosed business losses. In addition to checking your IRS tax transcripts for unreimbursed business expenses, lenders will look to make sure you don't own any undisclosed side businesses. If you have looses on your tax returns resulting from side work, selling things on the internet, or any other type of small business, the lender has to count these losses against you. Again, it's important to be as transparent as possible with your lender because they will discover these side business losses while reviewing the tax transcripts obtained from the IRS.
Number four, shopping for additional credit during the mortgage loan process. Many borrowers believe that once they've obtained the initial pre-approval, their credit will not be checked again, leaving them free to take on new debts. Well, 99% of lenders today will recheck your credit the day before closing, looking for new debts that could cause you to no longer qualify for the home. So if you're out shopping for a new car or furniture, new credit cards, or any other debt, your lender will most likely find out. And if these new debts are more than you could afford, you'll be declined for your home loan at the last minute. Most borrowers don't realize, but when you close on a home loan, you sign a certification that nothing has changed about your credit. So if you did take out new debt and not tell the lender about it, it could be considered loan fraud. In order to avoid this loan fraud, most lenders will ask for an explanation of anyone who pulled your credit during the loan approval process looking for these new debts. Equifax, one of the credit bureaus, even has a new service that emails your lender the moment anyone pulls your credit and the moment any new debts show up. So they can proactively check for new debts throughout the entire process. The bottom line is don't shop for new credit until after you close on your home. And if you absolutely have to, let your lender know first because they will find out. Any new debts have to be counted against your for qualifying. And this could lead to denial.
Number five, failure to disclose an ownership interest in the company where you work. In order to avoid additional documentation requirements for being self-employed, some homebuyers will not disclose their ownership in the company they work for and claim only to be an employee. Again, this may get you through the pre-approval process, but the ownership is almost always discovered in the end.
Lenders use multiple databases powered by the Department of Corporations, the IRS tax transcripts, and other sources to discover these types of undisclosed business ownerships. This almost always backfires. And the company ownership is discovered and leads to being declined at the last minute for lying on the application.
Additionally, this can also be considered mortgage fraud, which carries stiff penalties on certain types of loans. If you own any portion of the business you work for or any other companies, make sure you tell your lender.
Moving on with the rest of the list when we get back, so stay tuned. There's lots more pitfalls to avoid when you're applying for a home loan.
- [MUSIC PLAYING]Up Next...
- Welcome back. We're looking at the main causes of homebuyers going from pre-approved to declined during the mortgage underwriting process. These are things you should avoid to make sure your pre-approval stays valid and you ultimately get to close on your dream home.
We're up to number six, which is along the same lines as our previous one. And this is having an undisclosed family relationship with your employer. They're different rules for homebuyers who work for a family member. You see, when you work for a family member, there's a higher chance of fraud because that family member may be more willing to lie about how much you earn or your role in the company.
For this reason, additional documentation is required for borrowers employed by family members. Lenders have access to tools that discover possible undisclosed relationships between employers and employees. So make sure you tell your lender upfront if you work for a family member.
Number seven-- sticking along the same lines-- undisclosed relationships, another big one is having a relationship with the seller of the home. When a homebuyer and seller have a relationship, there's more room for side deals when it comes to down payment and inflating the value of the home. This makes lenders nervous. You see, lenders rely on an arm's length transaction, where the buyer and seller do not know each other, to make sure the buyer has done their due diligence in shopping for the home. A family member would be more willing to overpay for the home, putting the lender in a bad situation. This is called identity of interest.
And on certain types of loans, it can cause a significant increase in the required down payment. For this reason, some borrowers try to hide the relationship. But again, using the fraud tools, lenders are almost always able to discover an undisclosed relationship with the seller.
Number eight, making large undocumented deposits into your bank accounts. Most mortgage loans require 30 to 60 days worth of bank statements. This step sounds simple, but unfortunately can cause a lot of headache and hassle as you get ready to close on your home loan. Large deposits or frequent deposits or transfers can lengthen your approval process and raise doubt or suspicion about your credit file. If you're using the bank statements to prove receipt of income-- such as alimony, child support, or rent being deposited into your account-- you may be asked to provide six or 12 months of statements. And the large deposit rules will apply to these statements as well.
Any deposit that seems out of the ordinary will need to be satisfactorily explained and documented. So it's a good idea to pull out your bank statements as you get ready to begin the process of getting pre-approved and identify all of the large deposits that you might have made. Sometimes a quick trip to your local bank can provide you all the deposit slips or copies of canceled checks that you'll need in order to satisfy these requirements. Some of you may have a business on the side that requires you to deal in cash. And it may be wise to not co-mingle these funds. I recommend you open a separate account for your business and keep your every day account-- where alimony, child support, and payroll checks deposited-- separate. This will save you an untold number of headaches later on.
If you choose to keep your accounts together, keep documentation of any large deposits. This could be a bill of sale, copies of checks, or receipts. However, if you cannot document the deposits by an acceptable method, be prepared to delay the application or even closing process.
You'll also need to be prepared to give detailed explanations on any deposit that seem out of the ordinary in relation to the transaction history. But again, understand if the underwriter feels the explanation is unacceptable, the loan may come to a rapid halt.
One of the more common large deposits is gifts from family members. These gift funds will have to be documented by a specific letter, which your mortgage lender provides, called a gift letter. The letter is an affidavit that the funds were a gift and not a loan and will not need to be repaid.
It's signed by both you and the person giving the gift. And you'll need to provide a copy of the check, money order, or wire transfer showing when and how the funds were actually given. The family member who is giving you the gift will also need to provide the last 30 days statement on their accounts to disclose where the funds came from and show they had the ability to give you the gift from seasoned funds and that they didn't have to go out and borrow them.
Cash advances on your credit card, personal loans, or any other funds that are not secured by an asset of appropriate value are unacceptable funds for the down payment. Number nine, failing to file your tax returns on time. As I mentioned above, almost all lenders will request an independent copy of your tax returns directly from the IRS. If this result comes back that you have not filed your tax returns, it can lead to serious problems with your loan approval.
If you're behind on filing your tax returns, it's best to let your lender know upfront. Some lenders may have loan programs without this requirement, or they may be able to use your previous year's under certain circumstances. The last thing you want is to find out a few days before closing that you won't be closing on your new home because the lender discovers you failed to file your tax returns.
Number 10, a drastic change in your employment. This could include changing positions, changing employers, having your compensation structure change, or losing your job altogether. Changing jobs while you're in the middle of the mortgage process can make things more complicated and ultimately affect the credit decision.
The key factors that lenders are looking at in employment history is your ability to repay versus willingness and the stability of that capacity based on the frequency of job changes and the trend in earnings potential. Almost all lenders will contact your employer a few days before closing to verify nothing has changed with your employment. This extra last minute re-verification is required because of the number of borrowers who lost their job and never told their lender during the housing boom.
If anything changes about your employment situation, you're required to tell your lender. You sign multiple documents agreeing to inform your lender of any such changes and trying to conceal these changes or a loss of job can, again, be considered mortgage fraud. It's important to the lender that you're still employed and able to make your mortgage payments at the time of closing.
When we get back, we'll look at the last things in my list and look at how you can make sure you're doing your best job possible in shopping around for a mortgage
- [MUSIC PLAYING]Up Next...
- Welcome back. We're looking at the list of the top reasons homebuyers get declined after being initially pre-approved for the mortgage process.
Number 11 is owning additional properties or vacant land. Many borrowers fail to disclose properties they own free and clear, which can often include vacant land. Unfortunately, even though these properties have no mortgage payment, you're still liable for the taxes and insurance payments. Lenders perform a thorough search of public records looking for these types of undisclosed properties. So make sure you tell your lender about any additional properties your on title of.
Number 12, not disclosing mortgages that are owed to private individuals and not on your credit report. When you have a private mortgage, it doesn't show up on your credit report. So again, it's important you disclose all the properties you own and all the mortgages you owe. Lenders can easily find this information in public records. And it can lead to your application being turned down.
Number 13, not disclosing properties owned under an LLC or a corporation that you own. This one's pretty self-explanatory. Lenders want to know the full list of all properties you own, even if you put them into an LLC or a corporation. By cross-referencing the Department of Corporate databases with public property records, lenders can almost always discover these additional properties.
Number 14, failing to disclose child support or alimony payments you're required to make. These can often be substantial monthly payments that the lender must count against your qualification. If you owe these obligations, make sure your lender is aware of it upfront so they can make sure you qualify to purchase the home.
Number 15, borrowing the down payment. Lending guidelines require that you make the down payment from your own funds. This is to make sure you have something to lose if you stop making your payments. Many zero down loan programs had very high default rates because borrowers could walk away from the house and lose nothing.
While borrowing money for down payment is generally not allowed, there are a few exceptions. You can borrow against assets like stocks or your 401k or retirement accounts. This allows you to use the assets for down payment without having to liquidate and pay the penalties. Borrowing money from friends and family members or taking cash advances on credit cards for the down payment is strictly prohibited. This is the main reason banks review your bank statements so closely. They're looking to find evidence of borrowed funds. And most lenders will assume that any large deposit that you cannot document came from borrowed funds. Number 16, property problems. Even though you're fully approved to borrow money for a mortgage, the property you select may not be acceptable. Flip properties, this is a property where someone recently purchased the home for a very low amount and is now reselling it for significantly more. Most lenders will not let you purchase a property that was purchased and is being resold within a 90 day period. If the property was purchased in the last six months, lenders may require a second appraisal or justification for the increase in value. Homes in significant disrepair, certain repairs must be completed prior to closing on your new home loan. This can cause a problem because you don't want to spend money repairing a home you don't yet own. And the seller may be unwilling to pay for the repairs. In some cases, even if you are willing to pay for the repairs, the seller may not give you access to the property to have them completed.
Fully furnished homes, if you try to purchase a home with furniture, the furniture is considered an inducement to purchase and must be appraised. And your down payment will be increased by the value of the furniture.
Condos, there are very strict rules regarding condo approvals. So make sure any condo you're interested in is eligible for financing before getting too far into the process.
Number 17, attempting to simultaneously purchase additional properties. Because many lenders have a cap of four mortgage properties, borrowers will sometimes attempt to close on multiple homes at once and not disclose the other properties to each lender. Lenders monitor credit pools and national property databases to check for multiple applications.
Also, because most loans made today are through Fannie Mae, Freddie Mac, or FHA, these companies maintain a database of active applications and cross-reference this information. So if you attempt to buy multiple properties at once using different lenders, you'll most likely be caught and declined. And again, you can even be charged with mortgage fraud.
When we get back, we'll wrap up the list and take a look at the final things you should avoid to make sure your pre-approval doesn't turn into a declination.
- [MUSIC PLAYING]Up Next...
- Welcome back. We're wrapping up our list of the top things you can avoid to make sure your pre-approval stays approved through the mortgage process.
Number 18 is failing to disclose or attempting to hide any other pertinent information. Borrowers often make the wrong assumption that the lender will limit the credit analysis to just the information disclosed on the application. Well, borrower beware. This is not the case.
Underwriters are not only credit analysts but also highly qualified investigators who are on the prowl for any indication of mortgage fraud. Lenders today have a number of tools and technologies to dig deeper than ever into the information you disclose and try to make a responsible, prudent credit decision. Some of the items on this list are even considered mortgage fraud. And lenders are required by law to submit what's called a suspicious activity report, or SAR, to the FBI when certain fraudulent activities are attempted. So you could end up with a much bigger problem than just being turned down for your home loan. So make sure you're honest with the lender and disclose as much information as possible, allowing them to make an accurate decision on your loan approval and avoiding any last minute heartbreak. You see, when information is discovered at the last minute that can prevent you from closing on your dream home, there's nothing worse.
In addition to being transparent with your lender, remember to always shop around and make sure you're getting the best deal on your mortgage. There are a growing number of mortgage companies who are paying real estate agents to recommend their services. This tactic allows them to charge higher fees because most homebuyers are less likely to shop around when a real estate agent recommends the lender.
I've posted a real estate agent code of ethics on my website that you should download and make your real estate agent agree to before working with them. You can find it at SavingThousands.com/.
Let's go through a quick recap of how you shop for your mortgage. Step one, always select at least three lenders to compare. Step two, start with comparing the lender fees and focus just on the lender fees section of the Good Faith Estimate to make sure you find the best deal. Step three, negotiate the best rate that's available to be locked in immediately. Don't let the lender convince you to float your rate. You should lock it at the time you're shopping around. And step four, compare all these deals side by side and make sure you're getting the absolute best one.
If you'd like to download the full list of all these reasons, again, they're available online at SavingThousands.com/. So you can have them handy and make sure you're prepared to make your pre-approval stay approved through the entire mortgage process. We'll be back next week right here on TV 27, Saturday at 10:00 AM. And don't forget to check out my radio show on FM 96.5 WDBO, Saturday morning at 8:00 AM, where you can call in and ask me live questions on the air. I hope you have a great rest of the weekend. We'll see you back here next week.
Be sure to join us again next week as Robert Palmer shares more ideas on how you can save thousands while making every day decisions. That's next Saturday at 10:00 AM right here on central Florida's TV 27.
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