What is Underwriting?

Underwriting is the process by which a mortgage lender evaluates a home buyer’s mortgage application and determines whether the mortgage should be approved.

A Longer Definition: Underwriting

Underwriting is a detailed evaluation of a borrower’s ability to repay a loan.

An underwriter performs the underwriting of a mortgage, which may include verifying a home buyer’s credit history, employment status, income, debts, and other characteristics of the transaction. This can include factors like the condition of the property and whether the transaction is an arms-length transaction.

Each mortgage type features different underwriting standards, known as mortgage guidelines.

An FHA mortgage is underwritten differently than a USDA loan and a VA loan. A HomeReady mortgage is underwritten differently than a Home Possible mortgage.

As part of the underwriting sequence, an underwriter may check credit reports for payment history and outstanding debts, verify employment through recent pay stubs or contact the employer directly, and confirm income by examining tax returns and bank statements.

Additionally, an underwriter may review a property’s value to ensure it aligns with the loan amount requested.

When underwriting is complete, the home buyer’s mortgage application is marked approved or denied.

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Underwriting: A Real World Example

Imagine a first-time home buyer applying for a low-downpayment mortgage to purchase a home.

The mortgage lender’s underwriting sequence will include a review of the buyer’s:

1. Credit report, to ensure the buyer’s FICO score meets minimum standards
2. Monthly income and debts, to ensure that the program’s debt-to-income maximums are not exceeded
3. Employment history, to ensure that the buyer’s income is likely to continue

Underwriting may also require an appraisal of the subject property to ensure its value is commensurate with the purchase price, proof of a paid homeowners insurance policy for the upcoming 12 months, and a clean title report.

After every checkbox on the underwriting list is satisfied, the lender can issue a clear-to-close, indicating that the home buyer may schedule their closing.

Common Questions About Underwriting

What does an underwriter look for in a mortgage application?

An underwriter evaluates the home buyer’s credit history, income stability, debt ratios, and the property’s value, focusing on the buyer’s ability to fulfill loan obligations.

How does a home buyer’s credit score affect underwriting?

A home buyer’s credit score is crucial in underwriting, as it indicates past credit management and repayment behavior. Higher scores typically result in better loan terms and more borrowing options.

Can underwriting result in loan rejection?

Yes, underwriting can lead to loan rejection if the buyer fails to meet the lender’s criteria or if there are significant issues with the property’s value or condition.

How can applicants prepare for the underwriting process?

Applicants can prepare by ensuring their credit history is accurate, managing debts, and having all required documents organized and available.

Does the underwriting process differ for different types of mortgages?

Yes, the underwriting process can vary for different mortgage types, such as conventional, FHA, or VA loans. Each has its own requirements and guidelines.