What does Mortgage Underwriting mean?

Your mortgage application: underwriting and loan approval

Once you submit a mortgage application, it goes into underwriting. But what does underwriting mean?

Mortgage underwriters examine your loan application and income and asset documents to approve or (rarely) decline your application
Computers can approve mortgages, but human underwriters must verify that your documents match the information that you provided during your application
Underwriters usually require proof of your income and assets and may have additional requests in order to issue your final approval.

Your approval is usually subject to conditions. These conditions can range from bank statements to tax returns to explanations about your credit. Some of them may seem redundant or unnecessary, but such is the nature of mortgage guidelines. Your processor will reach out and advise you on what additional items are requested and when they are needed by. All requested conditions must be in and approved before you can close.

It starts with an application

You begin the application process by working with a loan officer. He or she takes your initial information provided and completes an official mortgage loan application.

Your loan officer provides a Loan Estimate (LE) form and other disclosures to you, answers your questions about the forms, and tells you what you need to provide to secure your mortgage approval.

Underwriters check a borrower’s “three Cs.” These Cs stand for character, collateral and capacity. In other words, your credit rating, income and the property value.

Underwriters are not always human

In most cases, during your pre-approval stage, your loan officer or processor submits your application electronically to an automated underwriting system (AUS). The program generates a recommendation and a list of conditions, which you must meet in order to finalize your approval. (Fannie Mae’s Desktop Underwriting system’s results include “approve,” “refer,” or “refer with caution.”)

If you get a “refer” response, a human underwriter must take a second look and perhaps underwrite your loan manually. “Refer with caution” usually means that the system declined your application.

If you get an “approve” response, the system kicks out a list of conditions you must meet to finalize your approval. Your loan officer will help you get these things, and a human underwriter will make sure that the documents you provide match the information on your loan application.

Mortgage underwriter checklist

A primary role of the underwriter is to approve loans that will perform and limit risk. That means carefully examining a borrower’s entire loan profile. Typical tasks include

Examining credit history. Your credit history is one of the most important factors in the loan approval process. Underwriters analyze your credit history because of the way you managed debt in the past is a good predictor of how you will handle your mortgage obligation. Late payments or collections will require additional documentation or brief explanations to ensure that the situation has been remedied and is not likely to repeat.

Verifying employment and income. Underwriters verify your employment history to make sure your income is stable. They may call your employer to make sure you work there and will review your last two years’ W-2s or tax returns (or school transcripts if you don’t have two years of employment). Underwriting systems also compare your income and debts, calculating what’s called a debt-to-income ratio, or DTI.

Check home appraisal. A licensed home appraiser compares the property to nearby, similar homes, and establishes its market value. Underwriters examine the appraisal to make sure that the appraiser followed the lender’s guidelines and made accurate adjustments to arrive at the value given to your home. If this is a purchase, as opposed to a refinance, this value needs to support (or exceed) the purchase price.

Verify asset information. Your down payment is a very important factor and underwriters scrutinize it carefully. Did it come from your own funds? Or does your last checking account statement contain some weirdly huge deposit? They’ll quiz you and ask for more documents, in that case, to make sure that the down payment was not borrowed or furnished by someone who benefits from the sale, like the seller or real estate agent.

Automated underwriting

Most banks and mortgage lenders use Automated Underwriting Systems (AUS). They are sophisticated software systems that render preliminary underwriting decisions.

The system lets a human underwriter know if a mortgage applicant meets the lender’s guidelines, based on information from the loan application and credit reports.

Fannie Mae’s version of automated underwriting is DU (Desktop Underwriter), and Freddie Mac’s is LP (Loan Prospector).

Once a loan officer or processor submits an application, the AUS reports its findings and generates conditions. Usually, conditions simply involve proving that what was input on the application is true — bank statements and pay stubs, for instance, to verify the income and assets stated on the application.

Most mortgage lenders sometimes do a manual underwriting of mortgage applications. Usually, that’s because the applicant has an insufficient credit history or the credit report has been compromised by identity theft. Unusual mortgages or very large loans are also frequently underwritten manually.

Most lenders that fund mainstream programs use a combination of automated and manual underwriting to complete a mortgage decision.

“Approved with Conditions”

There are a number of stages in getting a mortgage loan. Your first step is mortgage pre-qualification. And then you’ll complete an application and submit it for mortgage pre-approval. After your loan comes out of underwriting, the goal is to have your loan approved with conditions.

Don’t be fearful when your lender tells you your approval has conditions. A conditional loan approval is very standard. Satisfying the loan conditions, whatever they may be, is how you turn your conditional loan approval into a full/final approval.

Underwriting conditions can vary according to the type of loan for which you’ve applied, your employment, income and overall credit profile. The way you or your lender complete the mortgage application can influence your approval and the conditions you must meet.

Final approval

Examples of underwriting conditions could include anything from documentation of proper homeowners insurance to letters of explanation for certain items in question with your loan file.

And some conditions can trigger a request for additional ones. For instance, your pay stub contains a deduction for child support that you didn’t put on your application. Now you’ll need to provide your divorce decree.

The best thing you can do as a soon-to-be homeowner is to respond promptly to your loan officer’s and your mortgage processor’s requests. It’s also important to understand not to shoot the messenger here.

Your loan processor is your liaison between you and the underwriter. If you don’t understand or can’t comply with a condition, he or she may be able to help you find a way around it and get your loan closed. Remember that all of us at Carlson Mortgage are ultimately on your side and doing our best to help you close your loan on time.

Relevant links:

Our loan application can be found here or you can call us at 314-329-7314 to speak with one of our loan officers. Also, here is our pre-approval page, if you are looking to buy a home.

Posted by: Carlson Mortgage – a St. Louis mortgage broker providing home loans in the state of Missouri. We are routinely ranked as a #1 mortgage broker in Missouri on Yelp, Google and Zillow. We can be reached at (314) 329-7314 seven days a week. Let us be your source for some of the lowest mortgage interest rates in St. Louis on first-time home buyer, conventional, FHA, Veterans (VA), Jumbo and condominium (condo) financing. Since 2004, we’ve been providing home loans and mortgage services in St. Louis that are tailored individually to your unique needs and to your financial situation. Our loan officers speak English, Spanish and Russian. Call us today to inquire about home loan interest rates, to get pre-approved for a purchase or a refinance mortgage, or if you have any general mortgage lending questions.