Mortgage Underwriting Errors

Common Mortgage Underwriting Errors Made By Underwriters

Gustan Cho Associates are mortgage brokers licensed in 48 states

This BLOG On Common Mortgage Underwriting Errors Made By Underwriters Was UPDATED And PUBLISHED On July 3rd, 2020

The mortgage underwriting phase is what determines whether mortgage loan application is approved or not.

  •  Mortgage underwriters are the people that goes over the whole mortgage application package and determine whether or not borrowers meets the mortgage lenders lending guidelines
  • Mortgage underwriters will review borrowers loan application and supporting documents such as the following:
    • pay check stubs
    • two years tax returns
    • 60 days bank statements
    • other documents such as the following and appicable:
      • bankruptcy papers
      • foreclosure paperwork
      • divorce decree
      • child support payment agreements
      • social security and/or pension award letters
  • Once the mortgage underwriter reviews borrowers application, loan documents, and credit report, the mortgage underwriter will render a decision.

In this article, we will discuss and cover Common Mortgage Underwriting Errors Made By Underwriters.

Typical Mortgage Underwriting Errors

Mortgage underwriters are human and do make errors.

  • If borrowers got issued a loan denial, there will be a reason why the mortgage underwriter issued a mortgage denial
  • Most experienced loan originators will not submit a loan application if they did not feel confident that they will get a loan approval
  • Prior to a loan denial, most underwriters will contact the loan originator to warn them that they will deny a loan application due to certain reasons
  • Other underwriters will just plain deny the loan without warning
  • It depends on the lender and also depends on the underwriter

Reasons For Mortgage Loan Denials

Most common reasons for mortgage loan denials are due to high debt to income ratios.

  • Loan originators need to qualify income
  • They need to make sure that the loan applicant meets the required debt to income ratios
  • If loan originator qualifies a loan applicant at a certain income but the underwriter comes up with a different figure, then the debt to income ratios required can be out of compliance and the underwriter can deny the loan application
  • Income is one of the biggest mortgage underwriting errors in the mortgage industry
  • Mortgage underwriting errors on income can be that the underwriter did not calculate overtime, part time, and bonus income correctly

Common Mortgage Underwriting Errors

As discussed on the prior paragraph, one of the biggest mortgage underwriting errors is income qualified by underwriters.

  • Overtime, part time, and bonus income can count as income
  • This holds true as long as the loan applicant has a two year history of the following:
    • overtime
    • part time
    • bonus income and the likelihood is likely to continue for the next three years

Errors When Calculating Qualified Income

However, some underwriters make mortgage underwriting errors where they do not count overtime, part time, and bonus income because the income is decreasing.

  • Instead of looking further for the reason of declining income, they just wipe it off and not count it at all
  • Decreasing overtime income, part time income, and bonus income can be used as long as there is a good explanation of declining income due to time off work
  • Another common mortgage underwriting errors is when a borrower changes jobs from part time to full time
  • If borrower changes job status from part time status to full time status, underwriters can use the new full time income to qualify mortgage loan
  • Unfortunately, many underwriters still make the error of averaging the two years of income
  • Both part time and full time income, and using the combination of the part time income and full time income as the borrower’s monthly gross income
  • Mortgage underwriting errors like these happen all of the time
  • Loan originator needs to point this out to the underwriter
  • If the underwriter does not change her decision needs to take this matter up with the lending institution’s management staff or the underwriting manager

Are Underwriting Errors Common

As previously mentioned, underwriters are human and do make mistakes.  If borrowers get a loan denial by a underwriter, go over the reason for the loan denial and if there are mortgage underwriting errors, make sure to request a rebuttal with supporting documents and a strong detailed letter of explanation. Unfortunately, a loan can be denied at the last minute or a clear to close can be rescinded due to mortgage underwriting errors not caught at the beginning of the mortgage process.

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  1. What to do if the processor and underwriter made an error in calculating the DTI? When we did the calculations and showed the error, the processor refused to reconsider and submitted the DTI she had to the underwriter as is. The underwriter took the DTI and used it in her decision without checking further. Are there things we can do in such a situation?

    1. The underwriter’s job is to make sure the dti is correct. Mortgage underwriters do not issue conditional approvals without verifying borrowers debt to income ratios.

  2. Hi Mr. Cho,
    When a customer has a mortgage with 95% LTV, according to IPC rules, they can use only 3% credits or contributions from Sellers/Lenders/Realtors or amount equal to closing costs. When the rebates from realtor and lender combined are above closing costs but below the IPC guidelines of 3%, what happens to the excess credit? Can it be used towards downpayment? Or is it just not used?
    Appreciate your response

    1. Any access in seller concessions need to go back to the seller. Cannot be used for the down payment. Normally, if we have access, we buy the rate down with discount points.

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