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If the loan originator's job is to half-cheerlead, half-guide you into applying for a mortgage -- like a Sherpa or a car salesman, depending on what personality type you get -- it's the underwriter's job to stop all that excited momentum and meticulously review every detail of the loan application with a magnifying glass. This person determines whether the loan is a good proposition or too risky from the lender's point of view. As such, the reasons they might slow down your timetable are numerous.
Typically, they need more documentation or information to meet the conditions of the mortgage. They also may need explanations of certain things in your credit or employment history -- not only from you, but from other parties. Other times, they're assessing the property you want to buy, as well as the contract between you and the seller.
You probably won't be able to predict everything an underwriter will ask for, but you can help expedite the process by trying to anticipate their needs and prepare for them before you're asked.
Here are some of the things an underwriter might need from you during the process of reviewing your loan:
1. Copies of bank statements
This is one of the most common asks, although it's generally required at the beginning stage, such as when you're shopping for a preapproval. The loan officer may only ask for two to three months' worth at that time. As you get further down the road, the underwriter may request more -- up to two years' worth, especially if you're doing a bank statement loan (a loan that uses bank statements as proof of income).
Alternatively, companies that have moved toward electronic applications may ask you to link your bank account into their system so they can access the statements directly.
2. Tax returns -- or IRS transcripts
Two years of tax returns are the norm, and these are also typically requested at the outset for preapproval. However, for self-employed loan applicants, the underwriter will often want to get transcripts directly from the IRS once the application reaches their desk.
3. Copies of 1099s and/or W-2s
You may ask, "If an underwriter already has my tax returns, why do they need copies of my W-2s or 1099s as well?" That's for them to know, and you not to argue about. Actually, never argue with an underwriter.
4. Letters of explanation (LOX)
If the underwriter spots anything curious in your financial records -- e.g., money transfers, something unusual on your credit report, deposits from a source that isn't obviously your primary employer -- they may request a letter of explanation from you.
5. Verification of employment
This is something a lender will often request directly from an employer. They commonly inquire about the likely future of your position as well as salary.
Note that some lenders will request these letters from self-employed folks as well as full-time employees. If this feels uncomfortably like asking for a reference or testimonial, it's not. It would be requested from the accounting department and would simply confirm your status as a current or past 1099 contractor/vendor.
6. Letter from an accountant verifying self-employment
For self-employed people, your CPA can quickly become your biggest ally during a loan application process. All the meticulous bookkeeping and documentation they've done for you over the years will pay off in immediate credibility for you in the form of third-party verification letters. The letter verifying self-employed status is usually the first one you'll need.
7. Profit-and-loss statement from an accountant
Many underwriters ask for this as supplemental documentation from self-employed people or small business owners, especially if you are applying for a bank statement loan. P&L statements allow underwriters to see your year-to-date balance sheet beyond what figures you state for tax purposes. Ideally, it only takes a simple request to your CPA, and you would have to pay them only for the time it takes to prepare it. If you’re up to date on your monthly bookkeeping, it’ll be easier for all parties than if you let things backlog till taxes are due.
Note, if you don’t have a regular accountant, you can prepare the P&L using accounting software and/or a template, but underwriters may require it to be audited by a certified independent CPA.
8. Proof of payment of rent, or rental verification form
This is typically requested from people applying for bank statement loans, especially if they do not have very many other open lines of credit.
9. Proof of cash reserves
Sometimes an underwriter will simply want to know where your closing costs and down payment are coming from; other times, they'll want to know you have the funds saved for six months to a year of monthly mortgage payments.
This is a sampling of documentation an underwriter might request, but it's not everything. Remember, these are conditions you must fulfill to get the loan, so if you're asked, just provide -- don't ask why they need it.
A few more potential reasons for a delay
Even if you think you've provided what an underwriter asked for, you may not have done it to their exact requirements and they may request another form of documentation. Here are a few scenarios that could hold things up:
- They might need different file formats of a certain document than you originally provided. In an age of screenshots and smartphone images, an underwriter usually likes scans/PDFs.
- They might want to request certain documentation from the source instead of letting you procure it. See, for example, IRS transcripts or verification of employment.
- Even if your documents check out, the underwriter might need more time to evaluate the property itself more carefully -- especially if it's a second home purchase or a type of asset that's classified as higher risk, like a condo.
Due diligence takes time -- especially for complicated situations
The underwriting process should be pretty straightforward for you if you're lucky enough to be in a household with two full-time employed adults and meet the following criteria:
- You've each had a W-2 job for at least two years and filed taxes on time.
- You've kept multiple credit lines open with low usage.
- You have the equivalent of a year of mortgage payments in your savings.
If that sounds like you, you may only need to provide pay stubs, two years of tax returns, and permission to pull credit reports.
If your life is a bit messier, with credit cards close to the limit, student loans, or medical bills, or you're one of the growing "gig economy" workforce, the underwriting process will likely be a bit more complicated. That said, a little preparation can go a long way.
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