Mortgage Loan Underwriting

Once a mortgage application is taken, the phase of the loan process known as underwriting begins. It is perhaps the most difficult segment of the process because information must be collected and thoroughly analyzed in order to decide whether or not the loan will be granted. The borrower's employment, income, and funds on deposit for the down payment and closing costs must all be verified. An appraisal may also be ordered at this time. Depending on the type of loan, other documentation might be requested, as well.

The underwriter, or loan endorser, carefully reviews the borrower's documentation and decides whether he or she would be a sound lending risk. If segments of the borrower's employment, credit history, or overall financial picture are vague, problematic, or appear to be contradictory, the underwriter will request more information. This decision process can take hours or even weeks to complete. However, much of the procedure is streamlined using current technology such as electronic underwriting and credit scoring, which help interpret the borrower's financial qualifications.

The underwriting phase generally also includes the approval of the property for Private Mortgage Insurance (PMI), if required on the loan. This insurance protects the lender from the borrower's default, usually on loans-to-value of over 80 percent, and requires a separate approval based on the insurance company's underwriting guidelines.

Many problems can occur during this time. Borrowers sometimes change their financial pictures while the loan is being processed. Whether good or bad, these changes may invalidate the decisions made up to that point. Therefore, after the borrower applies for a mortgage loan, he or she should not change jobs, give notice to terminate employment, or otherwise make any major financial adjustments. If loan processing takes more than a month or so, the lender may re-verify everything before closing (including employment) just to make sure that all is still well.

The same is true with taking on new debt. Just because the application has been taken doesn't mean that the lender won't know if the borrower purchased a new washer and dryer on credit. An inquiry from the appliance dealer will show up on the credit report, and even adding a new small monthly debt may be enough to tip the scales against a marginal loan. Simply put, the rule of thumb for borrowers to follow after application is made and before closing is this: Just don't change a thing!

Difficulties can also crop up when verifying the borrower's funds, called verification of deposit. The lender wants to make sure that the down payment has not been borrowed or gained by illegal means, and will likely verify that the money has been accumulating in an account, usually undisturbed for a minimum of 60 days. Funds that quickly disappear and reappear may trigger a red flag, putting the validity of the money into question and perhaps causing the lender to deny the loan. If funds have increased or decreased radically (through account transfers to other banks, etc.), the borrower should make sure that the lender understands the reasons why. Salary increases that will become effective within 60 days of loan closing may be considered for qualifying, and a larger down payment could make the buyer stronger in the lender's eyes. The thing to remember is that if anything changes materially, the borrower should notify the lender immediately.