How Mortgage Underwriters Look at Your Loan Application

What Does a Mortgage Underwriter Do When You Apply for a Home Loan?

This article covers the role of the mortgage underwriter and how he or she views your loan application.

Mortgage underwriters evaluate loan applications by applying a set of rules.

  • Underwriters determine if the applicant’s income, assets, and credit meet the lender’s guidelines.
  • Then they verify the information and documents submitted by the borrower.
  • Mortgage underwriters issue loan approvals, loan denials, and requests for additional documents or information (called loan conditions).

Often, a home loan application goes through an automated underwriting system (AUS) first. The AUS delivers a preliminary decision and then a human underwriter takes over.

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What Do Mortgage Underwriters Do?

What are the duties and role of mortgage insurers

Mortgage companies rely on mortgage underwriters to be their guardian angels. In most cases, a loan officer or mortgage loan processor submits a customer’s application to automated underwriting. The AUS issues a recommendation — approve the loan, deny the loan, or refer the loan (more information required).

The AUS generates a list of conditions with its recommendation. Typical conditions include pay stubs to prove income, copies of bank statements to show the source of the down payment, and a home appraisal proving the property value.

Human underwriters receive these conditions. They examine the documents to make sure that the borrower provided what the AUS asked for. Human underwriters also verify the authenticity of the documents.

They might contact employers to verify employment and income. They could ask for more information if something unexpected comes up. If they get a bank statement with 30 bounced checks, for instance, they will have questions.

Conditions Requested by Mortgage Underwriters

The mortgage application process can be stressful if you are not an organized person. Expect to document your income and assets. You’ll also need to explain any credit problems and answer whatever questions come up in the underwriting process.

Here is a list of common underwriting conditions:

  • Pay stubs, tax returns, and/or W-2s proving your income
  • Bankruptcy filing if applicable
  • Foreclosure, short sale, or deed-in-lieu documents if applicable
  • Divorce decree if it affects your credit or if there is court-ordered support
  • An explanation for irregular or large deposits to accounts
  • HOA documents for condominiums
  • Gift letters for down payments

Mortgage applicants can get frustrated by the underwriter’s requests. Underwriters don’t make these requests lightly, however. They must be able to support a decision to approve your loan and prove that you meet the requirements of the program. Neither the lender nor the underwriter usually has a choice in the matter.

If you want to finalize your approval and be cleared to close, supply the needed documents or information as quickly as possible. If you cannot obtain a document, tell your loan officer right away. He or she might be able to find another way for you to make your case.

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Letters of Explanation

What are explanatory letters

You must provide a letter of explanation if an underwriter needs more information to consider approving your loan. Before getting irritated by this request, understand that the underwriting is trying to find a way to approve your application. Help your underwriter help you by supplying the letter.

You might need a letter of explanation for late payments or other derogatory credit events. or to explain unusual income or multiple job changes within two years.

Do not worry about letters of explanation to mortgage underwriters. Your loan officer should write the letter or help you write it. Your loan officer is the go-between between you and the underwriter. He or she knows how to craft a good letter and how to increase your chance of loan approval.

Bank Statements

Bank statements are an important part of the home loan application. You’ll need to prove your most recent two months of statements for most programs.

Underwriters examine them to make sure your down payment comes from an acceptable source. Anyone who will benefit from the transaction, like the seller or Realtor, cannot help you with your down payment. You also cannot borrow your down payment in most cases.

They also want to see how many months of reserves you’ll have after closing. (“Reserves” are funds that you’ll be able to use to pay your mortgage if your income is interrupted. Divide your savings by your monthly mortgage payment to get this number.)

Bounced checks might require explanation because they call your money management skills into question.

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