The Underwriter: Unseen Approver of Your Mortgage
Once you have found a house you like, made an offer and been pre-approved for a mortgage, you might think you are home free. However, you still have an important hurdle to clear: Getting through the loan underwriting process.
Think of the underwriter as a gatekeeper. The underwriter won’t let you in the front door unless you can thoroughly demonstrate your creditworthiness.
The Real Estate Detectives
Underwriters are like real estate detectives. It’s their job to make sure you have represented yourself and your finances truthfully, and that you haven’t made any false or misleading claims on your loan application. Their standards are much higher than loan pre-qualification requirements.
It wasn’t always like this.
During the housing boom in the early-to-mid 2000s, underwriting standards were comparatively loose, allowing many people to take out home loans who lacked the means to repay them. In recent years, loan requirements have gotten tougher. In January 2014 the Consumer Financial Protection Bureau enacted stricter requirements on some mortgages, which included tougher background checks into your bank account, spending and employment history.
Underwriters will check your credit score with the three major credit bureaus: Experian, Equifax and TransUnion. If there’s a red flag on your credit report—from such things as bankruptcies and collections—you will have to provide a letter of explanation with valid reasons for your past mistakes and the steps you have taken to correct the credit blemish. You may be able to overcome past credit problems if you have a solid employment history or agree to make a large down payment.
Part of the underwriting process reviews the appraisal of your prospective home to make sure its value matches the size of the loan you are requesting. This is important, since appraisers are sometimes pressured by buyers, sellers and their representatives to set a value that justifies the loan and clears the path for a sale. A good underwriter will take into consideration the location of the home and how it might be affected by natural disasters, such as floods.
Your Perceived Risk
Your income and the amount of money you owe will be factored in during the underwriting process. Generally, your total monthly debt obligation, including mortgage payments, should not exceed 43 percent of your pretax monthly income. More debt or lack of a sufficient income can increase your perceived risk.
The depth of the underwriting investigation depends on how great a risk you are considered to be. An investigator for the underwriter will contact your employer to verify the job and salary you listed on your loan application. If there is a question concerning your job history, credit report or personal finances, the underwriter will ask for additional information.
The best thing you can do to improve the chance of approval is to respond with prompt and complete information.