When you apply for a mortgage and successfully pass preliminary review, your application and the information you supplied to your loan officer are compiled and sent to the loan underwriting division. This is an important part of the application process as the loan underwriter has an integral role in deciding if your loan application will be approved, suspended or declined.
What is an Underwriter?
Mortgage underwriting is a cross-referencing process that banks and other financial institutions use to construct and evaluate the financial profile – which includes the credit history, repayment capacity, and proposed collateral – of potential borrowers. Mortgage underwriters rely on this financial profile to calculate your creditworthiness valuation.
The loan underwriter reviewing your application is usually employed directly by the financial institution you approached for a mortgage loan. However, banks and other financial institutions can and do outsource loan underwriting during busy periods. If you want more details about who is overseeing your loan underwriting, you can try contacting your loan officer.
How Does Loan Underwriting Work?
Loan underwriters separate the loan underwriting process into three distinct stages. We’ve described each stage briefly here:
- Information gathering: After submitting your loan application, loan underwriters may request more detailed information on your residential history, employment status, annual income, savings record and any other assets.
- Information verification: Underwriters use internal data systems and private credit reporting agencies to verify the accuracy of loan application information.
- Information analysis: Loan underwriters spend the bulk of their time categorizing and quantifying borrower information to determine if the risk exposure of a loan extension is financially viable for the bank or financial institution.
How Long Does Underwriting Typically Take?
Loan underwriters will typically spend several hours verifying and combing through the information in your file and loan application. Unfortunately, the number of new loan applications submitted per day often exceeds the number of loan underwriters available at the receiving bank or financial institution.
This means that in some cases, loan underwriting from major banks can take up to 45 days. If you are in a rush for loan approval, smaller financial institutions have shorter application queues and will generally take less time to complete loan underwriting.
What are Underwriters Looking For?
When loan underwriters construct your financial profile, they use a principle called the “Three Cs”. If you are interested in what underwriters look for in a financial profile, we’ve broken down each component of the “Three Cs” below:
- Credit: Does your credit score show a pattern of regular repayments and responsible borrowing habits? In particular, loan underwriters are looking for individuals that have taken on significant loans, such as car loans or student loans, and paid them off while avoiding defaults.
- Capacity: Are you capable of tackling long-term financial liabilities? Underwriters determine your repayment capacity by breaking down your employment history, cash reserves, non-liquid assets and pre-existing debts.
- Collateral: What is the valuation and classification of the property? Underwriters look for borrowers offering reasonable loan-to-value (LTV) ratios on primary residence houses.
When Do Underwriters Suspend or Decline Loans?
The underwriting process is a security mechanism for both lenders and borrowers. Rigorous underwriting standards prevent borrowers from taking on risky loans and safeguard lenders from high rates of loan defaults.
If your lender suspends your loan application, your loan underwriter may require additional financial information or clarification. However, when a lender denies a loan application, it is usually because the loan underwriter has flagged the borrower for irresponsible credit habits or inadequate repayment capabilities. Loan applications for investment properties – which financial institutions typically view as higher risk than primary residences – can also be a red flag for loan underwriters.
If you’re still nervous or confused about the loan underwriting process, consider reaching out to connect with an experienced real estate agent from Clever Real Estate. Our Partner Agents can break down different home financing options, help secure buyer rebates, and connect you with lenders or loan products that are tailor-made for your financial circumstances and long-term objectives.