Explaining the Loan Process Part 4: Mortgage Underwriting

There are many steps associated with securing a home loan. After the preparation, paperwork, Pre-Approval and appraisal, you’ll find that you’re still not quite ready to pick up the keys to your new property. Your lender must first provide final verification to ensure you’re equipped to repay your mortgage in full and on time. This step is where the mortgage underwriting process comes into play.

During the underwriting stage, your application moves from the loan processor to the mortgage underwriter. The underwriter will ensure your financial profile matches your lender’s qualification guidelines and loan criteria. Then, the underwriter will make the final decision to approve or deny your loan application.

Let’s look at the intricacies of the mortgage underwriting process and how you can prepare for this important step.

Understanding Mortgage Underwriting

The purpose of mortgage underwriting is to assess the borrower's financial stability, evaluate the risk associated with the loan and ensure that the loan meets the lender's guidelines and criteria.

During the mortgage underwriting process, a certified underwriter will be responsible for analyzing your risk to determine if your loan terms are acceptable. The certified underwriter, who is employed by the lender, will review the information and documents you submit with your application to ensure they meet investor guidelines, and that your income, finances, credit and assets align with the details provided.

Mortgage underwriting standards have become more stringent, thanks in large part to the Consumer Financial Protection Bureau requirements enacted in 2011. Mortgage underwriters must verify the applicant’s employment and financial history before approving a loan.

Depending on your lender, the mortgage underwriter may be part of an in-house underwriting team or a separate processing/underwriting company your lender uses to outsource the underwriting process. The underwriting process may vary slightly among lenders, who can delegate responsibilities to originators, processors and underwriters accordingly. Make sure to check with your loan originator (loan officer) for guidance on what information to send to whom.

In addition to the underwriter, the other key players in the underwriting process include:

• Borrower(s). These are the applicant(s) such as yourself, attempting to obtain financing for a home purchase, refinance or home equity loan. During the underwriting process, you (and any other borrower, if applicable) may be required to submit additional documentation or answer questions (most commonly provided by a letter of explanation).
• Loan Officer. This person is responsible for assisting borrowers in the initial loan application process and coordinating with underwriters.
• Appraiser. The appraiser is the impartial professional who will objectively determine the fair market value of the property in question as well as gather other pertinent information, such as how the property is currently being used. The appraisal will be ordered by the lender and reviewed by the underwriter to assess and confirm the value, verify the occupancy type and whether there is anything unique or unusual about the land or structure. Certain health and safety standards will also need to be verified, as the U. S. Department of Housing and Urban Development (HUD) along with certain loan programs have stringent requirements in this respect (e.g., the FHA requires hand railing for stairs and does not allow peeling paint for a loan to be approved on a home.).

Preparing for the Underwriting Step

Because the borrower has already filled out an application and has been working with a loan officer, the underwriter will typically have much of the documentation they need, such as:

• Completed loan application
• Credit report
• Income and employment verification

That being said, the underwriter may request additional information depending on the loan terms and conditions. For example, a self-employed borrower will be required to submit additional specific documentation. This can include personal and business tax returns, a profit and loss statement, personal and business bank statements, and sometimes a letter of explanation for any credit inquiries within the last 12 months to verify that no new tradelines or accounts have been opened that the underwriter must take into account when calculating the borrower’s debt to income ratio.

Common Challenges and How to Address Them

During underwriting, often either your loan officer or a dedicated processing team will be your primary point of contact while the underwriter assesses your loan application and documents (these exact specifics will vary from lender to lender). At Pennymac, after your loan officer locks in the loan, the Mortgage Success Team will be your first point of contact throughout your new home loan journey, while the loan officer will still be there to answer any questions and restructure the loan if needed.

Stay engaged and respond promptly to any requests for additional information to expedite the approval process.

The following are a few common hurdles that may arise during underwriting and how you can best avoid and address them.

Insufficient Credit

Nowadays, many lenders are required to check the borrower’s credit twice during the home loan application process: once in the beginning, either during Pre-Approval or when the rate is locked, and once right before closing to ensure nothing has changed significantly. Maintaining a good credit score throughout the application process is crucial. Any changes can delay your loan process or adversely impact your ability to obtain a loan. For example, if you significantly increase your balance on a credit card, have credit inquiries or open a new tradeline (any open account that will appear on your credit report, such as a car loan), this can affect your credit score as well as your debt to income ratio, which in turn impacts the pricing of your loan and ultimately whether or not you are able to qualify.

Incomplete Applications

Lenders need a clear understanding of your financial situation to evaluate risk. Incomplete information on the application requires additional time for underwriters to gather information. Incomplete applications may also increase the likelihood of errors, leading to incorrect risk assessments. Double-check that all submitted documents are complete and accurate.

Untimely or Inaccurate Responses

For the purposes of approving or denying your loan, a mortgage underwriter is essentially a real estate and financial investigator. This means they will review all of your documentation and paperwork in detail and reach out to you when something needs clarification or an explanation (for example, if the information provided on the application does not align with the borrower’s current situation or line of work). Don’t be concerned if they ask for clarification on a late payment, missed signature or large deposit — these are all routine requests. The important thing is to respond quickly and accurately, which will reduce the length of the underwriting stage and expedite your chances of being approved.

Communication Lapses

The underwriter will take care of reaching out to the necessary parties, but that doesn’t mean you have to sit back and wait. Give your employers or other relevant parties advanced notice that they may be contacted to provide information. Call your lender and/or broker to check on your application’s status to make sure the underwriter has all the necessary information. In addition, keep records of your conversations with your lender so you have a history of what documents were provided and when.

The Underwriting Timeline

Underwriting mortgages is an essential part of the overall home loan process and generally takes about 30-60 days, depending on the type of loan, lender, current volume of borrowers, and whether an extended review must occur (if, for example, new information is presented or simply additional documentation is needed). Authentication and verification of the loan are the primary reasons for underwriting, and mortgage companies are very thorough in reviewing every aspect of the loan before they’re able to finalize it. This means that if the underwriter encounters an issue, it may delay your closing.

How to Expedite the Underwriting Process

Underwriting a mortgage can’t, and shouldn’t, be rushed. It takes time for the lending company to verify your information and do a final evaluation to determine whether you meet the ability to repay the loan. On the other hand, while the underwriter is ultimately responsible for approving your loan, taking steps like protecting your credit score, responding to information requests promptly and checking in with your lender regularly can help reduce your risk and make the process go more smoothly.

Risk Assessment in Underwriting

To assess a borrower’s risk, mortgage underwriters primarily look at the “Three C’s” of underwriting:

Capacity: Do you have the means and resources to pay off your debts? Underwriters assess your available resources by reviewing your employment history, income, debts and asset statements. (Note: If you are self-employed, you will be asked to provide additional documentation such as income and work status.)

They will also review your savings, checking, 401(k) and IRA accounts to ensure you can still pay your mortgage if expenses arise unexpectedly. Underwriters will pay particular attention to your debt-to-income ratio; they want to ensure you have enough money to fulfill your current financial obligations, as well as take on a new mortgage.

Credit: Do you have a solid repayment and credit history? Your credit is one of the most important factors in the loan approval process. The underwriter will review your credit score and determine your ability to make the proposed mortgage payments on time and in full.

Collateral: What is the value and type of property being financed? The mortgage underwriter must ensure the loan amount does not exceed the loan-to-value requirements of the product. Otherwise, in the case of a default, a lender may not be able to recover the loan’s unpaid balance.

To place a fair and current value on the property, the lender will order a home appraisal to be performed by an appraisal management company, who will contact either the borrower or real estate agent to arrange a visit to conduct the appraisal. Once the appraisal is complete, it will be sent to the underwriter to review.

The underwriter will likely also review the type of property you want to buy. This is important for several reasons.

First, different types of properties carry different risks. For example, many lenders consider an investment property a riskier investment. This is because, historically, a borrower who is in a difficult financial situation is more likely to walk away from an investment property than their primary residence.

Second, lenders need to be sure that the property they’re helping you purchase doesn’t already have any legal claims on it. The lender will likely work with a title company during underwriting; mortgages, liens, claims, easement rights, unpaid taxes, restrictive covenants and pending legal action already attached to the home can derail a possible loan. Performing a title search ensures that the property can be transferred to you once the mortgage is finalized.

Common Issues That May Raise Concerns for Underwriters and How to Mitigate Them

Underwriters assess various factors to determine the risk of lending money to a borrower. Below are several common issues that may raise concerns for underwriters and some strategies for mitigating them.

Credit History

• Delinquencies
• Late payments
• Bankruptcies
• Foreclosures
• Collections
• High credit utilization ratio
• Active disputes

How to Mitigate

• Establish a consistent payment history
• Check your credit score and address any issues
• Maintain a low credit utilization ratio
• Resolve any credit disputes
• Take action on any collection accounts

In essence, be sure that there are no derogatory marks on your credit report that will set off red flags or accounts in active dispute status. Most lenders will not proceed until all such items have been resolved, as these situations can cause an artificially inflated credit score.

High Debt-to-Income Ratio

• Significant recurring expense obligations, including credit cards, car loans and student loans, in comparison to income

How to Mitigate

• Pay down existing debts as much as possible
• Explore opportunities to increase income
• Avoid opening new credit tradelines or accounts

Unstable Income or Employment History

• Frequent job changes
• Inconsistent income sources
• Temporary work

How to Mitigate

• Stay with the same employer for an extended period
• Supplement income with additional work or projects (as long as they are consistent and have been a part of your regular income for at least 2 years)

Inaccurate or Incomplete Information

Errors or discrepancies in the information provided on the application:

• Income verification
• Employment
• Asset documentation

How to Mitigate

• Double-check all information you provide on the application and make sure that it is accurately aligned with the documents you will be submitting
• Respond promptly to any requests for additional information, documentation or clarification

Communication During Underwriting

Open communication between you, your loan officer and the underwriter is crucial throughout the underwriting phase. The process should take a collaborative approach where you receive updates and clear explanations of underwriting guidelines, and you provide proactive responses to questions and requests for additional information.

While many documents submitted during the loan process are standard, such as pay stubs, bank statements, W-2 forms and 1099 statements, your underwriter may ask for supplementary documents. It can be a good idea to understand what you may be required to provide in advance so you can prepare. A few examples of documents your lender may request include the following:

Gift Letter

Your underwriter may request a gift letter if a family or friend gave you money for your down payment. You’ll want to ask your donor to write a letter that specifies the amount and states that the money does not have to be repaid. To be accepted by the lender the gift letter must contain the following:

• The actual dollar amount of the gift received
• A statement by the donor that no repayment is expected
• The donor’s name, address, telephone number, and relationship to the borrower

Letter of Explanation

You may be asked to submit a letter of explanation to clarify any concerns the lender has regarding your loan application, such as:

• Unconventional income sources
• Financial issues
• Negative marks on your credit report
• Discrepancies regarding occupancy or any other red flag

This letter allows you to provide additional context and explanations for any aspects of your financial history or documentation that may raise questions from the lender's underwriting team.

Self-Employment Documents

To verify your income as a self-employed individual or business owner, you may be required to submit additional documentation beyond the standard application requirements. This includes business federal tax returns for the past two years and profit-and-loss statements. By providing this information, you demonstrate your financial stability and assist the lender in accurately assessing your loan eligibility.

Getting Approved

In the underwriting process, you will move from conditional approval to final approval as your loan application is reviewed and evaluated. If you’ve already received a Pre-Approval, you may be wondering what the difference is between that, conditional approval and full approval.

Here’s an overview of what those terms mean.

Pre-Approval

At Pennymac, we offer borrowers a Pre-Approval as one of the first steps in the home-buying process. This is when we review your financial information, including your credit report, and estimate the loan amount you could be approved for. A Pre-Approval at the beginning of your home-buying journey helps you understand how much of a mortgage you may qualify for so you can shop for a home that fits your budget.

A Pre-Approval occurs before underwriting, and while it is not a loan finalization, it’s a significant move in that direction. Once you find your home, you can move faster on your offer. Plus, since you’ve already submitted the majority of the documentation you’ll need for the mortgage, the loan process can be smoother and faster.

Once you’re pre-approved, you will also have the option of locking in your mortgage rate with Pennymac’s Lock & Shop program prior to finding a property. Doing so can protect you from any possible future rate increases due to market fluctuations as you search for your new home.*

Conditional Approval

A conditional approval means your mortgage will likely be approved, but it’s contingent upon fulfilling certain requirements set by the lender. Receiving conditional approval means your application and documentation have gone through underwriting or a similar process and a comprehensive list of everything required to close the loan has been provided.

Full Approval

Full approval is when you are cleared to close. After a thorough assessment, the underwriter has confirmed your eligibility for the loan and granted final approval. You're now eligible to proceed with the loan closing process.

The Underwriting Decision

You’ll receive final approval after you meet all investor and underwriting requirements and guidelines. If one or more of your loan's criteria still need to be met, you could be denied. A few reasons why an underwriter may deny a loan include:

• Inability to validate certain documents or information
• Discrepancies or errors in the borrower's documentation
• New information surfaces that raises doubts about the borrower's creditworthiness or the value of the property
• Borrower took on additional debt
• Borrower’s income decreased
• Borrower changed jobs
• Unexpected issues with home appraisal or inspection
• Borrower failed to meet loan conditions, such as resolving credit issue

What If You’re Denied?

If your loan is denied after you’ve already received conditional approval, seek clarification from your loan officer to identify the specific reasons why and take appropriate actions to rectify them.

You may also want to ask them if the following could improve your chances of approval:

• Increasing your down payment
• Requesting a smaller loan
• Choosing an alternative mortgage, such as an FHA loan

Just because your loan was denied doesn’t mean you’ll never be approved. It simply means that certain factors need to be addressed before you can qualify. In many cases, it will just take more time, whether it’s improving your credit score or staying in your new job for a bit longer to establish stability. Once you have addressed these issues, you can reapply for a loan.

Do All You Can to Help Your Underwriter

With the home you love at stake, the underwriting process may feel intimidating. However, being prepared by filling out your application and supplying supporting documents carefully and accurately will save you precious time and help you have a smoother experience. A Pennymac Loan Expert will be happy to answer any additional questions you may have about the underwriting process.

Jump to...

• Part 1 - Explaining the Home Loan Process
• Part 2 - 1003 Uniform Residential Loan Application Explained
• Part 3 - Understanding Loan Processors and Mortgage Processing
• Part 4 - Mortgage Underwriting
• Part 5 - The Closing Process
• Part 6 - Loan Service Transfer

*Lock & Shop Program allows consumers with a purchase mortgage Pre-Approval from Pennymac to lock a rate prior to locating a property. The program requires a non-refundable fee of $595 due at the time of the rate lock. Consumers with a purchase mortgage Pre-Approval from Pennymac must meet appropriate underwriting conditions to obtain a mortgage loan. Consumers may choose between a 60-day, 75-day or 90-day lock period. Consumers must initiate a mortgage loan application for a specific property and be under purchase contract for the property at least 30 days prior to lock expiration in order to extend the locked rate. All rate lock extensions are subject to Pennymac’s standard rate lock extension fees. After the rate lock and subject to favorable market conditions, consumers may be eligible for a one-time reduction in rate once the loan application for a specific property has been initiated (0.50 % maximum reduction in interest rate allowed). Eligible loan products are Conventional Fixed, Conventional ARM, FHA Fixed and VA Fixed. Program excludes Jumbo, refinance, third-party and in-process loans. Program subject to termination in Pennymac’s sole discretion and without notice.

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