When you apply for a mortgage loan, you fill out an application and you tell the lender about your income, assets, and liabilities. Underwriting is the verification of that information and specially looking to ensure you can make the payments on the loan. Underwriting says, you told us in your application you make $85k a year, now prove it. You said you have $50k in your bank account, now prove it.
The jist of all the documentation you provide the lender is to prove what you said in the application and demonstrate your credit worthiness.
Underwriting looks at all the documentation in the file and uses the 5 C’s when determining if they should give you a loan: Character, Capacity, Capital, Collateral, Conditions. Let’s look at each one.
| Character | Basically your credit history, including credit score. Have you proven to use credit responsibly in the past? If so, you are likely to repeat that responsibility. |
| Capacity | Do you have enough income to make this payment when considering all other debts you have to pay. We call this the debt to income ratio. In short, they are looking to see if you have the capacity to take on more debt. |
| Capital | The amount of money and liquid assets to you have. Do you have enough to make the down payment, closing costs and still have reserves left over to make the payments if your income is lost for a specific period of time. |
| Collateral | Collateral is the house you are buying, you promise the house in exchange for the loan, if you default, they can take the house back through foreclosure. Is its value what you are paying for it and is it secure to provide a loan against? This is addressed through an appraisal. |
| Conditions | What are you wanting to borrow? What for? For how long and at what interest rate? These variables (like your Loan To Value or LTV) will impact the payment and your ability to qualify for the loan. |
It’s absolutely critical you provide everything exactly what the lender is asking for in a timely manner, including all pages of your documents – yes even those pages that say “this page is intentionally left blank”. You want everything to be in the file for your underwriter to make a decision then and there. If you are missing items, you lose precious time in the process and could delay your loan closing.
Underwriting Decisions
Once your underwriter has reviewed your loan request, there are several decisions they can make.
| Approved | Congratulations are in order, you have been approved for the loan! |
| Conditional Approval | Based on initial review, the underwriter believes you will be approved, but is missing information. Maybe they need more paystubs, documentation from a divorce, etc. |
| Suspended | Major information is not able to be verified (like your employment), the file will be suspended until you are able to assist with this missing information. |
| Denied | Your request for a loan has been denied, but don’t take that news and stop there. Ask why you were denied and if there are ways to remediate it. If your debt to income ratio is too high, could you pay of credit card debt to get you back into the proper ratio to qualify? Could you get a gift for down payment funds for insufficient assets? |
What not to do once you have applied for a mortgage
Do not make major life changes during this time. Don’t change jobs, make major purchases, buy a new car, open a new credit card or miss any debt payments. These can all change your 5 C’s, so keep them steady while in this phase. Lenders will verify you are still employed right before closing.
The whole mortgage and underwriting process can take 30-45 days on average, so be responsive if your lender requests information. Once you are approved you will be ready for closing. A trusted REALTOR® can help you along in this process to make sure everything is happening on time for your closing.