When you apply for a mortgage you deal with many people, some of which you never see. The one person you have the most interaction with is the loan officer. This is the person who you start the mortgage application process with and who you stay in contact with throughout the process. A person you may never see, but who plays an integral role in your mortgage approval is the mortgage underwriter. This person goes through the information and documents you provide to determine if you should obtain mortgage approval.
The Documents You Provide
Many documents are necessary to secure a mortgage approval. Every lender differs in their requirements, though. Here are the most commonly requested documents:
- Proof of identity (driver’s license)
- Social security number (to pull your credit)
- Proof income (paystubs, W-2s, and tax returns)
- Proof of employment (employer’s contact information)
- Proof of assets (bank statements)
- Documentation of any child support you pay or receive (if using for qualifying purposes)
- Documentation of any alimony you pay or receive (if using for qualifying purposes)
- Provide any miscellaneous documentation pertaining to your income, debts, or assets
- Documentation of any bankruptcies or foreclosures to prove the date of discharge
The Mortgage Underwriter Reviews the Loan Package
Once you provide your loan officer with the above documents, the underwriter analyzes them. His first priority is to make sure you provided all necessary documentation for loan approval. He also analyzes the loan application itself to make sure it is filled out in its entirety. Most underwriters will not start the loan process until the application is completed and all supporting documentation is provided. This helps to streamline the approval process rather than going back and forth one document at a time.
Looking at the Three C’s
Underwriters have two ways to underwrite a file – manual or automated. Most lenders prefer the automated system because there is no guessing involved. Your loan application is either approved or denied – there is no in between. This gives the lender full confidence that you should receive the loan. However, not every loan application has the ability to go through the automated system. If you have any special circumstances, the underwriter will perform a manual underwrite on it. In this case, he will look at the three C’s of underwriting:
- Credit – The underwriter will go through your credit history, not just look at your score. He will look for issues in the past, such as late payments or more serious issues, such as a bankruptcy. The lender usually looks at the big picture, but too many late payments in the last year could render you ineligible for a new mortgage.
- Capacity – The capacity of your mortgage application is your ability to repay the loan. The lender looks at your debt ratio (income versus your current debts) as well as your assets, and the longevity of your employment. Each of these factors plays a role in your ability to obtain a mortgage.
- Collateral – The collateral for a mortgage is the property you purchase. The underwriter needs proof that the home is worth the value you say it is and that your loan does not exceed that amount or the maximum LTV allowed.
In this situation, the underwriter looks at each factor individually as well as altogether. For example, if you have a low debt ratio and a lower than average credit score, the underwriter has to use his judgment regarding your eligibility. The low debt ratio could make up for the low credit score. On the other hand, if you have a high debt ratio and low credit score, you will have a hard time finding someone who will approve you for the loan.
Mortgage underwriters also use automated underwriting. This means they input all of your information into a predetermined program. Fannie Mae and the FHA have their own programs. Based on the information the underwriter inputs, the program provides him with an approval or denial. In some rare cases, they provide a status, such as “Refer with Caution.” This means the system recognizes there are some good qualities in the application and some special circumstances. The mortgage underwriter must then manually underwrite the loan to see if it is eligible for an approval.
Evaluating Compensating Factors
One thing an underwriter can do to help your case is to evaluate your compensating factors. These are things like:
- An exceptionally low debt ratio
- A high credit score
- Several months’ worth of reserves in a liquid account
- A large down payment or low LTV
If you have any compensating factors, the underwriter can use them to evaluate your loan in a new light. The underwriter can use these compensating factors to help push your loan through when you do not meet strict requirements, such as having a minimum 640 credit score. Let’s say you have a 635, but you have compensating factors, such as 6 months’ worth of reserves and a 25% debt ratio. These compensating factors may make up for your lower credit score, rendering you an approval.
The mortgage underwriter helps to determine the risk level of your loan. There are strict policies in place that he follows to approve or deny a loan. In some cases, his approval may be subjective, but these are very few and far between. Remember that you will probably not talk to the underwriter – instead, you talk to your loan officer who deals with the underwriter himself.