Do you fear the underwriter when you’re applying for a mortgage? Most people do, but they shouldn’t.
The underwriter holds the key to your loan approval. He/she has the power to approve or deny your loan. While this seems scary, knowing and understanding what the underwriter needs is important because, with the right steps, you can get approved.
While you won’t talk to the underwriter yourself, you’ll hear what he/she needs to clear your loan to close. Understand the process before you apply for a mortgage so you can get through the process quickly.
Start with the Loan Officer
All mortgage originations start with a loan officer. Whether you apply online, over the phone, or in person, the loan officer takes your details and matches you with a loan program. Together you’ll decide which loan is right for you. You also negotiate the loan’s terms with this before you close on the loan.
The loan officer looks briefly at your qualifying information. How much money do you make? How much money do you have? How long do you need to borrow the funds? How much do you need to borrow?
The loan officer uses this information to match you with the right loan. Once matched and pre-qualified, you’ll move on to working with the loan processor and underwriter who get your loan rolling.
Working with the Loan Processor
After you choose a loan program, a loan processor will contact you and ask for your qualifying documents. Most lenders need your income documents, bank statements, and sometimes your tax returns.
Most lenders go back two years with the exception of your paystubs, so make sure you have all documentation for the last two years ready.
At the very least, you’ll need the following:
- Paystubs covering the last 30 days
- W-2s for the last two years
- Tax returns for the last two years
- Bank statements for the last two months
Listen to what the loan processor needs to prepare you for the underwriter, who handles the entire approval process.
The Underwriter has the Key to your Approval
Once you provide the loan processor with the necessary documentation, he/she sends your paperwork to the underwriter. The underwriter’s job is to assess your risk.
The underwriter looks at all qualifying documents to decide whether you’re worth the risk. He/she compares your documents to the loan program requirements. If there are any issues or discrepancies, the underwriter may have the processor ask you for clarification or more documentation.
Underwriters evaluate all documentation you provided to the loan processor. Until this point, the processor collects the information and ensures its validity. The underwriter takes over from there.
Underwriters look at your paystubs to make sure your income matches what you stated on your loan application. Sometimes it differs slightly because borrowers don’t know how to calculate their monthly income. Unless you make a straight salary, underwriters may do it differently.
If there are large discrepancies, you may hear from the loan processor asking for more documentation to clear up any misunderstandings.
Underwriters look at your W-2s to see your annual income and how you did over the last few years. If your income decreased from year to year, they’d want to know why. They may ask for a Letter of Explanation and/or proof of why your income decreased. The more proof you have available, the better the chances of approval.
Finally, underwriters look at your bank statements. They look for large deposits (this could signal an undocumented loan), gaps in income, or other red flags. Ensure you provide all pages of your bank statements, even the blank pages because underwriters need them.
If the underwriter feels anything is lacking, he/she may ask for formal verification of your income or bank statements with a written Verification of Employment or Verification of Deposit.
Know What the Underwriter Looks For
Underwriters verify that the documents you provide match the information you provided on your application. They also look for validity in all documents.
They’ll calculate your gross monthly income, determine your total assets, and calculate your loan-to-value ratio.
They ensure the funds you use are yours and not a loan. Underwriters also ensure your income is legit by verifying it with what you filed on your taxes and requesting your tax transcripts (you’ll need to sign IRS Form 4506).
If any questions or problems come up, the underwriter works with the loan processor to determine if they should approve or decline your loan application.
Securing an Approval
The underwriter has the final say on your loan. If he/she approves it, you move on to the closing. If he/she doesn’t approve it, they’ll tell you why.
If it’s something you can fix, you may be able to delay the closing and revisit the loan once you have the right documentation/qualifications. If it’s not something you can fix, you may have to return to the drawing board with your loan officer.
Together, You’ll Secure your Loan Approval
Securing a loan approval is a team effort, and that includes you. The loan originator starts the process. You explore options and settle on a loan program with your loan officer/originator.
After you choose a loan, the process moves to the loan processor and underwriter, who work closely together. Your correspondence will be with the loan processor, but the underwriter has the power. He/she can approve or decline your loan.
Listen carefully to what you need to clear your loan to get a clear to close and get to the closing table. If you ever have questions, your loan processor and loan officer are there for you and are in direct communication with the loan officer.