What Do Mortgage Underwriters Do?

August 26, 2009 25 Comments »
What Do Mortgage Underwriters Do?

Here’s some Q&A with regard to the home loan approval process: “What do underwriters do?”

Once you actually apply for a home loan, your mortgage application will be organized by a loan processor and then sent along to a loan underwriter, who will determine if you qualify for a mortgage.

The underwriter can be your best friend or your worst enemy, so it’s important to put your best foot forward.  The expression, “you’ve only got one chance to make a first impression” comes to mind here.

Trust me, you’ll want to get it right the first time to avoid going down the bureaucratic rabbit hole.

An Underwriter Will Approve, Suspend, or Decline Your Mortgage Application

Put simply, the underwriter’s job is to approve, suspend, or decline your mortgage application.

If the loan is approved, you’ll receive a list of “conditions” which must be met before you receive your loan documents.  So in essence, it’s really a conditional loan approval.

If the loan is suspended, you’ll need to supply additional information or documentation to move it to approved status.

If the loan is declined, you’ll more than likely need to apply elsewhere, with another bank or mortgage lender.

The Three C’s of Underwriting

Now you may be wondering how underwriters determine the outcome of your mortgage application?

Well, there are the “three C’s of underwriting,” otherwise known as credit reputation, capacity, and collateral.

Credit reputation has to do with your credit history, including past foreclosures, bankruptcies, judgments, and basically measures your willingness to pay your debts.

[What credit score do I need to get a mortgage?]

If you’ve had previous mortgage delinquencies or even non-housing related delinquencies, these will need to be taken into account.

Typically these items will be reflected in your three-digit credit score, which can actually eliminate you without any further underwriting necessary if you fall below a certain threshold.

Your history supporting significant amounts of debt is also important; if the most you’ve ever financed has been a plasma TV, the underwriter may think twice about approving your six-figure loan application.

Capacity deals with a borrower’s actual ability to repay a loan, using things like debt-to-income ratio, salary, cash reserves, loan program and more.

This covers whether the loan is interest-only, an adjustable-rate mortgage or a fixed-rate mortgage, cash-out refinance or simply rate and term.

The underwriter wants to know that you can repay the mortgage you’re applying for before granting approval.

[How much house can I afford?]

Finally, collateral deals with the borrower’s down payment, loan-to-value ratio, property type, and property use, as the lender will be stuck with the home if the borrower fails to make timely mortgage payments.

Underwriters Consider Layered Risk

Now it’s important to understand that the three C’s are not independent of one another.

All three must be considered simultaneously to understand the level of layered risk that could be present in said loan application.

For example, if the borrower has a less-than-stellar credit score, limited asset reserves, and a minimal down payment, the risk layering could be deemed excessive, leading to denial.

This is the underwriter’s discretion, and can certainly be subjective based on other factors such as occupation, how long the borrower has been in the line of work, why the credit score is less than perfect, and so on.

The underwriter must decide, based on all the criteria, if the borrower is an acceptable risk for the mortgage lender, and if the end product can be resold without difficulty to investors.

Layered risk is a major reason why the mortgage crisis got so out of hand. Scores of borrowers applied for mortgages with stated income and zero down financing, which is certainly very high risk, and were easily approved.

Rising home prices covered up the mess for a while, but it didn’t take long for everything to unravel. This is why sound mortgage underwriting is so critical to a healthy housing market.

Mortgage Underwriter FAQ

Do underwriters work for the bank/lender?

Yes, underwriters are employees of banks, lenders, and mortgage bankers. They work on the operational side of things, making loan decisions after the sales team brings the loan in the door.

Why do underwriters take so long?

Hmm…I don’t know, because they’re approving a six-figure loan amount, or seven, to a complete stranger. The actual underwriting might not take that long, but the amount of available underwriters (humans) might be low. So you could just be in the queue. A clean loan file will get approved faster and with fewer conditions so get it right before the underwriter even sees it.

Do underwriters verify employment?

While employment is generally verified nowadays when you take out a mortgage, it might not be the underwriter verifying it. Instead, the loan processor may obtain the verification of employment (VOE). Many use the “The Work Number,” an independent third-party employment verification company now owned by credit bureau Equifax.

How much do mortgage underwriters make?

They can make pretty good money. Salaries may be in the high five figures to low six figures if they’re seasoned and skilled in underwriting all types of loans, including FHA, VA, and so on. If you start as a junior underwriter the salary could be less than $50,000.

Do underwriters make commission?

They shouldn’t because that would be a conflict of interest. They should approve/deny loans based on the characteristics of the loan file, not because they need to hit a certain number. Compensating them for loan quality might be a different story, but again could lead to discrimination if they cherrypick only the best loans.

Do underwriters work weekends?

I’ve heard of some that have. I don’t know if they do on a regular basis, but if loan volume picks up in a short period of time it’s possible to come in on a Saturday or Sunday. The mortgage world is all about highs and lows, so sometimes it might be slow and other times it’s impossible to keep up.

Are underwriters warm and friendly?

They can be if you don’t rub them the wrong way. I look at mortgage kind of like the DMV. Show up with the right paperwork and a good attitude and you’ll get in and out before you know it. Do the opposite at your peril!

(photo: Joelk75)

25 Comments

  1. Renee April 15, 2015 at 1:53 pm -

    My husband recently switched from employee to contractor that receives 1099. We are being told that regardless of credit score and down payment we will have to show 2 years of Self Employment tax returns in order to be considered. Is there any way around this and if we apply will we considered at all?

  2. Colin Robertson April 15, 2015 at 4:53 pm -

    Hi Renee,

    Changes in employment can present challenges, especially going from W-2 to self-employed, and certainly if it’s less than two years. But if he’s been doing it over a year and it’s in the same line of work and an equal or better position than his former one, it may be possible to get financing. It might be best to speak with a broker or two so they can scan their range of offerings to see what lenders might be willing to help. And maybe also reach out to some portfolio lenders who keep their loans and thereby underwrite a bit differently.

  3. RAD June 3, 2015 at 2:51 pm -

    if i have less than stella credit and a student loan in default, which is now being rehabilitated, how can i get my pre approval from a lender, ??

  4. Colin Robertson June 3, 2015 at 3:53 pm -

    Rad,

    You may still be able to get approved but it’s probably better to apply when your credit score is higher…lower rate, more options.

  5. rodger August 23, 2015 at 12:47 am -

    I included my home in a bankruptcy 5 years ago but the mortgage company has failed to foreclose on the loan, I have reestablished my credit and have a good credit score can I still buy a home?

  6. Jessica September 14, 2015 at 7:07 pm -

    So I have no credit. It’s not been established and I’ve also never made a large purchase, so i feel as if we would get laughed at. Nearing 30 would love to pay toward owning a home, our home. What are options for someone who doesn’t have a credit report,or a larger purchase, But a good income and years of management for the same company.

  7. Colin Robertson September 15, 2015 at 9:14 am -

    Jessica,

    A lender might be able to use alternate credit such as utility bills, cell phone bill, etc. But it’s better to have a car loan/lease and/or some credit cards with some years of history on each line to make qualifying a lot less hassle-free. Good luck!

  8. Caitlyn October 22, 2015 at 5:22 pm -

    My fiancé is currently in the process of purchasing a new home. He was approved for the loan, and then they started asking for other things. He did what they asked, and now we can’t close. If he was already approved, why are we still dealing with underwriter?

  9. Colin Robertson October 26, 2015 at 4:22 pm -

    Caitlyn,

    Could be a million different reasons. Every time new information is shared with the lender there’s a possibility for denial or the need for additional documentation. Sadly it’s a very intensive, bureaucratic process. Best to ask the lender directly what is needed and why.

  10. Jay November 30, 2015 at 9:58 pm -

    I had past payment problems on my last house due to a child being born 4.5 months premature and having to pay for a lot of dr. Bills and testing. Now my son is fine and we have another child and need to move into a bigger house. The end result I filed chapter 13 100% repayment plan in 2012 paid it all in full in just one year. since then I haven’t been on any payments credit cards or mortgage and my signature loan with my bank has been paid on time and almost paid off my credit score is a 681 717 677 idk why transunion is higher than the others. But will a underwriter deny me because of my past payment problems although I’ve had no late payments in over 3 years?

  11. Colin Robertson December 1, 2015 at 11:27 am -

    Jay,

    There are waiting periods to get a mortgage after filing BK, but if extenuating circumstances can be documented the period is much shorter. Depends on the type of loan and what you can prove.

  12. Nick January 12, 2016 at 12:06 pm -

    Colin,

    I am going the USDA route, I am very close to the income cap limit to qualify. I am just curious if underwriters are able to get some real time report from the gov that says you have had withholdings from your employer therefore your income or do they take your income verification straight from your paystubs.

    Thanks!

  13. Colin Robertson January 12, 2016 at 4:49 pm -

    Nick,

    The USDA is pretty strict when it comes to income to ensure the loans go to those who need them. They’ll likely ask for paystubs and W-2s and consider household and projected income.

  14. Kay February 4, 2016 at 5:27 pm -

    Colin,
    I have had rental issues that are on my credit report from the past 6 years. My report is at 676. My husband and I have been pre approved for a loan his score is a 767. What are the chances we may be denied?

  15. Colin Robertson February 4, 2016 at 5:33 pm -

    Kay,

    Credit score is just one piece of the pie. Your score could certainly be better but it being low may just affect the rate you receive, not whether you are approved or not. Good luck!

  16. Candace randall February 26, 2016 at 6:14 am -

    Colin,
    Can a underwriter deny your loan if they feel you you came off wrong and have a bad attitude? Can you fight it, meaning go over their head and talk to their manager? This happened to my fiancé. The underwriter denied his loan cause he came off wrong. He was just confused because she asked the same questions as the sales guy.

  17. Colin Robertson February 28, 2016 at 2:49 pm -

    Candace,

    That’s strange and hopefully not the case. Underwriters shouldn’t factor in one’s attitude as the process should be objective and based on the facts not emotion.

  18. Jazmin March 15, 2016 at 6:34 pm -

    I’m 3 weeks in closing and because my boyfriend the Co signer cannot guarantee 40 hours but we can 2 weeks just not the other 40 we are being denied is that possible??

  19. Colin Robertson March 16, 2016 at 9:54 am -

    Jazmin,

    It sounds like his income is being scrutinized, probably best to work with the underwriter/loan officer to determine how to get around the issue if at all possible.

  20. Debra March 25, 2016 at 6:52 pm -

    We’re so close! Our house is being built. Apparently, my husband’s scores are fine, and he gets a VA loan, but my median score using my mortgage guys system is a 588, and I need to be at least 600 to be a co borrower. I’m working with a credit repair company, but I’ll be devastated if this doesn’t go through. Thoughts on rental karma to bring up my score and becoming an authorized user on my brothers card to lengthen my history? Do we have a chance? Closing May 20th!

  21. Colin Robertson March 26, 2016 at 5:43 pm -

    Debra,

    Hmm…not sure if the authorized user data will bring up your score that quickly, but it’s possible. Any large revolving balances you can pay down in the meantime while also making sure you don’t mess with your cash reserves for the mortgage? Good luck!

  22. Yaniris May 26, 2016 at 6:55 pm -

    I’m trying to buy a house my fico score is only 606 but my boyfriend is 654 now the lender is telling me that my income is not good cause my taxes from last year I added self employ but this year I still work for the same company should I go to a different place?

  23. Colin Robertson June 1, 2016 at 8:07 am -

    Yaniris,

    You can always get a second or third opinion but your FICO scores certainly could use some major improvement, and the self employment income formula is pretty complex depending on what it is you do.

  24. Deborah Nance July 20, 2016 at 6:32 pm -

    I have money save will the underwriters want to know how I got the money

  25. Colin Robertson July 21, 2016 at 7:53 am -

    Deborah,

    Depends how long the money has been in verifiable accounts…if it’s been in the account for 60+ days no explanation may be needed, if less you will likely need to explain and paper trail deposits.

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