Please note: this post is the first installment of our Understanding Underwriting blog series. We know our customers frequently have questions about what goes on behind the lending-scenes, so we hope these pieces address your questions!
For some, the thought of an underwriter may bring to mind an image of someone seated at a desk, reviewing a mortgage application with towering “Approved,” “Denied,” and “Suspended” stampers in front of them. Truly, it isn’t quite that dramatic, but for the purposes of a simple definition; yes, an underwriter is the individual who approves, suspends, or declines your application near the end of the mortgage process. To illustrate this further, let’s explore the why and how of what underwriters do.
A loan file must meet guidelines set forth by Federal Agencies (HUD, CFPB, Veterans Affairs), Government-Sponsored Enterprises (i.e. Fannie Mae, Freddie Mac; aka GSEs), and investors. The criteria set forth by these institutions changes frequently to keep up with the changing lending environment, and part of an Underwriter’s job is to maintain a working knowledge of new changes as they arise. Before a mortgage company can fund a loan, the Underwriter will use their expertise in these areas to ensure the Federal and GSE guidelines are met by reviewing all aspects of the loan application, including the documents you have provided.
Fundamentally, an Underwriter determines if the loan applicant presents a risk to the lender. They examine whether that individual has declared bankruptcy, gone into foreclosure, and how that individual manages debt. If an applicant pays bills on time, has a strong credit score, and has a history of financial stability, then these things will act in their favor when an Underwriter is making this assessment.
Most descriptions of what an Underwriter does will include “the three C’s of underwriting”: Collateral, Credit reputation, and Capacity. These three areas represent (1) the items that serve as assurances for the loan, (2) the measure of an applicant’s willingness to pay their debts, and (3) the resources/means available to the borrower to pay off their debts. When an Underwriter verifies these three areas of interest, they will examine specific documents that help tell a story at the end of the transaction. For example, an Underwriter will review your employment history, credit reports, and documents pertaining to the home you are financing, among other things.
As your Mortgage Banker, Processor, and Underwriter are working together to make sure you’re applying for the correct loan program, applicants with complex finances shouldn’t feel as though the Underwriter is the enemy. When it comes to certain areas that the Underwriter evaluates, such as credit history, there is nothing you can do from which you can’t recover over time. In addition, there are a number of factors that may affect your mortgage application, and the vast majority of these things will be addressed before the final loan application is submitted.
Our Guide to Home Financing contains a complete glossary of mortgage terms, explanations of the merits of different loan types, and details about first-time homebuyer programs that could save you money.
Topics: Refinancing, Mortgage Application, Home Buying, Home Financing, underwriter, Buying a Home, homebuying, Underwriting, Mortgage Eligibility, Underwriter Job Role, Loan Guidelines, Risk Assessment