What is Underwriting?
By David Fuchs, Senior Mortgage Partner
Potential home buyers know that a mortgage loan is generally a part of the purchase process. But do you know what happens between when you apply and when you close? After submitting all appropriate documentation with the application, the loan goes into underwriting—a mysterious place for many buyers.
I may be overreacting a bit, but the connotations surrounding “underwriting” are less than great. Excitement for loan underwriting doesn’t top many buyers’ lists when they purchase homes. Regardless, underwriting is a necessary part of the process that all loans need to go through. I’m sure some readers of this article may have experienced loans falling through during underwriting when an issue came out of nowhere to rob them of a pleasant transaction between buyer and seller.
The purpose of this article is to educate you on what happens in the dark, scary place known as underwriting. It should also shed some light on what I think a dependable lender should do initially to make this dreaded underwriting process a little bit more predictable.
How Does the Underwriting Process Work?
Always Be Proactive with Documentation
When a buyer gets an initial pre-approval, there is a plethora of information they need to provide.
Depending on how you communicate with the company (telephone, electronic, in-person), the lender may or may not have documentation to back up what the applicant provides. The more proactive a buyer is with getting their documentation to the lender, the easier it becomes for a lender to spot potential problems.
One thing a lender can do after a completed pre-approval, with or without supporting documentation, is run the loan through an Automated Underwriting System (AUS). These automated underwriting systems hold the answers to the requirements that need to be satisfied to get the loan to the closing table. Freddie Mac and Fannie Mae have their own AUS’s that most lenders utilize when determining if a buyer will qualify for the loan. USDA has an underwriting system, known as the Guaranteed Underwriting System (GUS).
Debt-to-Income Ratios Don’t Always Tell the Whole Story
Many realtors and consumers alike can rattle off some of the primary, relatively accurate mortgage process assumptions. Your debt ratio can be about 43% for a conventional loan; for FHA, you can go to 50%. Debt ratios are the percentage of your monthly gross income devoted to paying debts. While these “myths” don’t tell the whole story, they aren’t entirely without purpose. The truth of the matter is, the golden ticket for a mortgage isn’t your debt ratio, and it isn’t even your credit score. The key is that the AUS gives you the green light! Without that green light, you will have to get a non-traditional mortgage product to make your deal work.
A proactive lender is always a suitable lender. Assuming that the information is accurate upfront, the AUS gives the lender the needed answers for the underwriting process. Attention to detail is always critical, as several factors can dictate what underwriters require. For example, the findings will state necessary items such as paystubs, tax returns, W2’s, and other items. The AUS findings will also explain what is needed to document and utilize any overtime, commission, or bonus income the buyer may receive on the loan application, provided they have a two-year history with their employer. The information given in the AUS findings should help make the process a little simpler and a little clearer for the buyer.
Always Be Upfront About Your Financial Situation
It is also of the utmost importance for buyers to be transparent and honest upfront. I recently had a transaction where a buyer told me the closing funds were coming from her 401k. About a week into the transaction, the underwriter discovered that the closing funds were coming from her husband’s 401k, and he was not a borrower on the loan for credit reasons. We had to re-run the findings utilizing gift funds for closing instead of the buyer’s funds, and it asked us for $2,500 in reserves. We were able to satisfy that requirement, but it created more back and forth with our customer than desired.
The goal of the initial AUS process is to gather all of the information in advance. In a perfect world, the lender requests this information from the buyer, and he or she provides all necessary documentation as soon as possible. At that point, the underwriter’s job becomes more manageable, as they need to verify everything submitted to satisfy the AUS requirements.
When the lender is proactive and the buyer is transparent, it should make for a hassle-free underwriting process, a clean mortgage approval, and a happy settlement day for everyone involved.
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