Much of your home loan application is analyzed behind the scenes by a mortgage underwriter. Loan officers at a bank or mortgage company provide loan pre-approval based on a preliminary review of your application, income, assets and credit, but the bulk of the paperwork is left to a manual underwriter for thorough review. An underwriter ensures that every aspect of the loan file meets the lender's and loan investor's guidelines. The underwriting stage can take hours or days, depending on the complexity of the loan file. Underwriting can also be an exhaustive process for some borrowers.
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Automated and Manual Underwriting
A lender may run your application information, income, assets and credit through underwriting software before it goes to the underwriter. Automated underwriting gives a fast and upfront response based on information you and the loan officer input into the system. Your loan may be approved, rejected or referred to a manual underwriter for further review based on the data you provide. Even when automated underwriting generates an approval, your loan file still undergoes a final, manual underwriter's review to ensure your financial documentation meets the lender's guidelines.
Underwriters Look Out for the Lender
Underwriters promote the lender's best interests. For example, underwriters working for a bank may adhere to the bank's proprietary guidelines, but if the underwriter works for a mortgage company that makes loans for Fannie Mae or Freddie Mac, the underwriter follows Fannie and Freddie rules. The same can be said for underwriters reviewing loans for Federal Housing Administration insurance -- they follow FHA guidelines. Borrowers usually must pay for a home appraisal when buying or refinancing a home. The appraisal report determines the home's value and condition. An underwriter reviews the appraisal to ensure the home is sufficient collateral.
Types of Documents Reviewed in Underwriting
Underwriters verify that your financial documents match the information you put on the application. For example, underwriters confirm your employment status by calling your employer or sending them an employment verification form. They also analyze one to two years of tax returns to verify your earnings. Underwriters scrutinize your bank statements and may request additional information about unusual deposits, to make sure you haven't borrowed money. They also require explanation for recent credit inquiries that appear on your credit report to determine if you've recently taken on more debt and whether the new debt will affect your ability to pay the mortgage.
Underwriting Red Flags
An increased debt load, misinformation on your application, gaps in employment, a home's hazardous conditions, or unverifiable income and assets can cause underwriters to deny your loan, change the terms of your loan, or request additional paperwork. Lenders require a certain debt-to-income ratio to approve loans. For example, should your debt load relative to your income exceed acceptable amounts, the lender can deny your loan. In the event of a low appraised value or serious, substandard property conditions, the lender may reject the loan. If your bank statement shows recent deposits for several hundred or several thousands of dollars, the underwriter may ask for a paper trail of each large deposit.