Meet the Real Estate Underwriter -- Your Mortgage Depends on Them

By: , Contributor

Published on: Jan 29, 2020

Though you probably won't have direct contact with them, a real estate underwriter (AKA mortgage underwriter) is someone who can make or break your home purchase. Here's how they do it.

It's no exaggeration to say that a real estate underwriter, or in industry terms, a mortgage underwriter, is the most important person in a real estate transaction. They're the person who actually determines whether a mortgage loan will go through or not -- in spite of the fact that they never interact directly with would-be buyers.

That's right. You'll never speak with the person who ultimately decides whether to approve or deny your home loan. Working for the lender, their job is to analyze risk on multiple fronts -- how much risk you are as a would-be borrower and how much risk the property itself is.

The process has become more stringent since 2013, when the Consumer Financial Protection Bureau issued its Ability-to-Repay Rule. Its purpose is to protect buyers from entering into overly risky loan agreements that might lead to them having homes repossessed. But of course, the other purpose is to protect the lenders, including the federal institutions that buy almost all conventional loans.

Mortgage underwriters fulfill a similar function in both residential and commercial real estate, but in this piece, we are looking specifically at how they work in the residential real estate world.

What does the underwriter do?

The underwriter is the person who works at a lender and assesses real estate loan applications for risk. As well as cross-checking and verifying all the financial details applicants provide to the mortgage broker and loan processor, they look at a myriad of other details to determine whether each applicant is a good risk. As a rule, they don't take anyone's word for anything -- nor do they bypass anything they deem to be an information gap.

Example 1: In reviewing bank statements, if they see a large amount come in that doesn't match with your typical monthly income, they might want written proof of where it came from and what it is.

Example 2: In reviewing employment, if pay stubs are not the standard large, corporation printed stubs, they might ask for a verification of income from the employer, as additional proof beyond the pay stubs.

Example 3: If the applicant has pay stubs from one state and is applying for a loan in another, they may ask that the employer letter verify that the person will be working from the state where they're buying the house.

The second part of the underwriter's job is to evaluate the property you wish to buy, as that property will be the collateral for the mortgage. For this process, they work with an appraiser who inspects the home and reports back on everything they've found, including, just for starters:

  • Exterior construction, particularly the condition of the foundation and the roof.
  • Lot size and useable square footage of the home.
  • Interior conditions, including a review of recent home improvements and/or additions.
  • The condition of the next-door yards and properties.
  • An overview of the entire neighborhood.

Based on their findings, the underwriter might approve the loan amount as being appropriate to the value of the home, or they might require that the buyer reduce their price to match the appraised value.

The 3 Cs

Underwriters use a formula known as the "3 Cs": Credit, Capacity, Collateral.

Credit reputation begins with your credit report and scores.

This is the variable most of us are familiar with -- to the point that many people believe a medium-high credit score is all that's needed to qualify for a home loan. That is not the case. The credit score is important, but the underwriter also looks at:

  • The number of credit lines open: It is preferred the applicant has at least three.
  • Borrower's credit history: It is advisable that all open lines be more than two years old, although sometimes it's OK if one of them is six months old.
  • Credit line limits: High limits with low balances are best.
  • Red flags: Even if a credit score is overall good, certain things may be flagged for further investigation.

Capacity is the applicant's perceived ability to consistently pay off the loan.

It is based on recent employment history and income, but also on a variety of other things like savings, other financial obligations, and a forecast of future employment stability.

This last one is most alarming to W-2 employees, as it may require the employer to actually confirm that they intend to keep the person on staff for the next year. For the self-employed, this process is typically complicated, but it's much easier to prove capacity if you have an accountant who can provide documentation and official letters for you.

Collateral pertains to assessing property -- the asset securing the loan.

Part of this relies on the borrower. What down payment can they offer, leading to what loan-to-value ratio (LTV)? But when it comes to appraising the property itself as the asset that secures the loan, there is nothing that the would-be borrower needs to do -- or, in fact, can do -- to improve their chances. It all comes down to the home and whether the seller has been realistic when setting their asking price.

When it comes to analyzing a loan application, the underwriter looks at layered risk. So, it's not just one or two variables. If you have mediocre credit, offering a higher down payment and showing substantial cash reserves may compensate -- you are layering higher risk on the credit front with lower risk in collateral.

When does the underwriter enter the scene?

After the loan processor has collected what they think is all the necessary documentation and records -- tax returns, pay stubs or 1099s, bank statement, credit reports, letters of employment -- they will send the file to the underwriter. Typically around a week after that is when the underwriter will make their presence known to the would-be borrower -- not directly, but via a list of conditions that they send to the loan processor, who in turn explains them to you.

Who directly interacts with the underwriter?

Usually the loan processor is the person who interfaces between the applicant and the underwriter. The loan processor is the one to receive the underwriter's conditions that they then pass along to the would-be borrower. In conjunction, the appraiser that the lender works with is also communicating with the underwriter as the appraiser goes through the process of evaluating the home (the collateral). Neither process is necessarily quick or seamless. If you're jumping through hoops for your underwriter, take heart in the fact that the seller might be as well.

What is the underwriter's process?

An underwriter may take only half a day to review your file, although the waiting period is usually more like a week because they're backlogged with files. After review, they typically return to the loan processor with a first list of "prior to documents" conditions, which you must meet in order for the loan documents to be issued.

If you meet those, there will likely be a second set of "prior to funding" conditions to meet before your loan can actually close.

While you do your work, the underwriter also evaluates the home you want to buy, so you may actually find out that it has not appraised for the asking price and you need to go back into negotiations with the seller to see if they'll take the lower price.

The title search is another point in the process where surprises on the seller's side might derail the loan approval. If there are outstanding liens or a title can't be insured, the underwriter will not be able to approve the loan.

What conditions might an underwriter request from a loan applicant?

There's seemingly no end to the variety and granularity of an underwriter's requests. In initial conditions, they might ask for a pay stub from a company you haven't worked at in a year. They might ask for you to officially explain why an address that you resided at 15 years ago appeared on their background check. They might also ask for something big, particularly in the prior-to-funding conditions -- for example, that you pay off certain outstanding debts or bills to lower your debt-to-income ratio (DTI).

Also, be aware that their requests can get very personal. If you've been divorced, the underwriter will probably want a copy of the divorce decree and documentation of any child support or spousal support agreements.

Occasionally the loan processor can intervene and explain that a document was already received, or a particular letter isn't relevant to the type of loan being applied for -- but for the most part, whatever the underwriter asks for, you must supply. This can include:

  • Cancelled checks or other bank-provided payment records to prove you paid an important bill.
  • Letters of explanation for something specific on your credit report.
  • Letters of explanation and proof of where any large incoming sums that weren't your "regular" paychecks came from.
  • "Gift letter" to prove that monetary gifts you received, e.g., money toward the down payment from a relative, were actually gifted, who they were from, and proof that the giver could afford it.
  • Statement of assets and proof of savings and investment accounts.
  • Documentation of outstanding financial obligations -- car loan, student loan, back tax payment plans, etc.
  • Proof of sufficient cash reserves to pay the loan for six or 12 months.
  • Verification of employment -- and for self-employed people, this may be required from several different clients.
  • Profit and loss statements (for self-employed applicants).
  • Letter verifying length of self-employment (for self-employed applicants).
  • Business license (for self-employed applicants).

What is conditional approval / approved with conditions?

If you've filed everything in the first round of conditions to an underwriter's satisfaction, they will issue a conditional approval and approve the loan documents to be issued. This does NOT mean you're approved; it means you get to work on the second set of conditions. And while you do this, don't make a single move financially that could hurt your credit rating or your monthly DTI ratio. Experts actually advise people to only pay for things in cash during this waiting period.

How long does an underwriter have to decline your loan?

An underwriter can decline your loan all the way up to the point where funds are released. In fact, seasoned experts typically advise not celebrating until closing.

What is a suspension?

If your application gets a suspension, it means that the underwriter needs more information relating to something they deem vital about your file. The process can't proceed till you provide the additional documentation requested. It may also require spending more money, either toward a down payment or to pay off a judgment or debt.

What if the underwriter denies your application?

If a loan application is denied, you go back to the drawing board altogether -- usually with a different lender.

The underwriter ultimately wants to close on good deals

The underwriter's job is tricky. Their employer, the lender, wants to close loans, but they also have to be mindful of whether those loans are good for the lender and the borrower. And as we stated at the beginning, the Consumer Financial Protection Bureau has made their job more difficult -- to the point where sometimes it seems even they don't know when to stop requesting and scrutinizing additional documents.

But at the end of the day, they are responsible for millions of dollars and need to be accountable to the lender, the investors, and the government. So, a meticulous level of detail is to be expected. The good news is that knowing what to expect can make for a smoother, less frustrating waiting period.

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