The Unseen Mortgage Approver Insights from an Underwriter

When you apply for a mortgage, you work with a loan officer or mortgage broker. This is your contact as you move through the process of mortgage approval and funding.

But what is going on behind the scenes? In reality, the person who is truly in charge of approving your mortgage is the underwriter.

What is a mortgage underwriter?

A mortgage underwriter is a person who decides whether you meet your mortgage program’s lending requirements.

For instance, if you need an FHA loan to buy a home, the underwriter will make sure you have a credit score higher than 580, enough funds for 3.5% down, and income to support the payment, among other things.

Truth be told, most underwriting is done by computer systems. A complex algorithm weighs all loan factors and decides whether you will, statistically, make your payments.

An underwriter’s job, then, is to verify the information input into the system. But that’s just the starting point. He or she also examines risk factors that a computer program just can’t understand.

For example, if you have a W2 in the file with mismatched fonts and numbers that don’t add up, the computer would never catch it. The underwriter, being human and all, most likely will.

The underwriter is more powerful than a computer program

The undewriter also has the power to override the computer’s decision.

They can address risk factors and make a judgment call on the file. That can work out in your favor, or against you.

For instance, if you have a low credit score, but impeccable credit for the past 18 months, an underwriter can actually overturn a computer’s decision to deny you.

But it works both ways.

You could receive an “approve” recommendation from the computer system. But then the underwriter receives a verification of employment from your employer indicating you will be laid off soon.

Though you look good “on paper,” the underwriter will need proof you have a new job lined up. If not he or she could deny the file.

Either way, the underwriter has ultimate decision-making authority, but also the responsibility to the lender to approve only quality files.

How can the underwriter help my approval?

When putting together your documents, think like an underwriter.

Provide complete documentation for your income, bank statements, tax returns, and anything else your loan officer requests.

One of the best pro-active things you can do is write a letter of explanation describing circumstances around any less-than-perfect items in your file.

For instance, if you have credit card, auto loan, or mortgage late payments, explain why those happened and evidence that they are not likely to happen again.

Same goes for gaps in employment, NSFs on your bank statements, etc. Paint a picture of financial stability.

You’d be surprised at how explaining the situation can turn an underwriter’s decision from “denied” to “approved.”

What factors does a mortgage underwriter consider?

When considering a loan, the mortgage underwriter evaluates what are known as the “three C’s of underwriting”:

• Credit: What is your credit score? And beyond the score itself, what went into the score? The underwriter can approve lower scores if recent credit history indicates you have recovered from past mishaps.
• Capacity: This is your ability to pay the debt. Do you have a high enough income to handle the monthly mortgage payments? Is your income regular? Also, are there other debt payments involved that might detract from your ability to pay?
• Collateral: The value and condition of the home involved is also a big consideration for a mortgage underwriter. If you do end up defaulting on the loan, the lender has to retain ownership of the property. They need to recover as much money as possible from the property. The home must be in good condition and the sales price supported by sales of similar homes in the area.

Lenders have different rules for determining whether or not a loan will be approved. Some lenders are willing to work with buyers who have poor credit, and who might have a higher debt-to-income ratio. Other lenders are stricter and expect to see excellent credit and a low amount of debt to reduce risk.

Other items that a mortgage underwriter might look at (depending on lender requirements) when determining final approval for a loan include:

• Flood Certification: If you are in a flood zone, you might be required to buy flood insurance before your loan is approved. If the property is destroyed by flood waters, there is no collateral for the lender to foreclose on in case of default.
• Title Information: Your mortgage underwriter will review the information from a title company about the legal status of your property. A title search will bring up prior claims on the property, and title insurance protects the accuracy of the work, just in case something comes up later. If your property has legal problems associated with it, your loan might not be approved.

Do Non-QM lenders use underwriters?

When looking into non-QM financing such as a bank statement loan or DSCR loan, you might wonder if these lenders use underwriters as well.

The answer is yes. The process for these loan types is a bit different than with conventional, FHA, VA, or USDA loans, however. Often, there is no computer system involved. The underwriter manually reviews the entire file to ensure it meets lender guidelines.

This can be a big benefit, because non-QM lenders have greater flexibility to approve outside-the-box scenarios compared to conventional or government program underwriters.

If you have a scenario that is a bit tougher, apply with a non-QM lender to see if you can be approved.

The underwriter is at the heart of the loan approval process

The mortgage underwriter plays an important role in the home buying process. You might never meet your mortgage underwriter, but s/he is at the heart of the process. It’s about making sure that you are capable of repaying the loan before the lender commits the money.