When you’re buying a home for the first time, it can be tricky to understand the responsibilities of each person involved in the process. If you’ve ever wondered, “What does an underwriter do?” or “What is the role of an underwriter?” We’re here to help.
A mortgage underwriter plays a key part in your home buying journey —so let’s jump into the details, starting with a review of how loan approval guidelines work.
Loan approval guidelines
Once you’ve found a fantastic home and made an offer, it’s time to officially apply for a home loan (mortgage). If you got a pre-qualification from a lender, you likely submitted some basic facts about yourself, but an official mortgage application will require more detailed info.
Each mortgage lender has guidelines that dictate eligibility requirements for certain loan programs. To qualify for a particular loan program, you’ll need to meet its eligibility criteria—and it’s the underwriter’s job to find out whether you meet the criteria.
At Clara, for example, we offer loan products to borrowers that require a credit score of 620 or higher. Like other lenders, Clara also has eligibility criteria for the borrower’s debt-to-income ratio and savings reserves, plus the property’s loan-to-value ratio.
Many lenders also require that loans meet the guidelines of government-sponsored agencies who purchase mortgages (like Fannie Mae and Freddie Mac). Fannie Mae, for example, has a maximum loan limit of $636,150 for a one-unit home in a high-cost area like San Francisco.
What does an underwriter do?
A mortgage underwriter’s main focus is making sure the information you submitted as part of your application is accurate and complete and, more importantly, that it supports your eligibility for a loan. Underwriters work hard to uncover any misleading claims or fudged numbers so they can confidently say your “file” adheres to all guidelines. They also hunt down any extra information that might fill gaps in your credit story to create a more thorough understanding of your risk as a borrower.
Underwriters are also responsible for ensuring compliance with certain regulatory requirements. After the foreclosure crisis of the mid-2000s, federal regulators enacted rules that expanded the responsibilities of mortgage lenders. Lenders are now required to ensure borrowers have the ability to repay their mortgages and investigate suspicious issues before giving a loan. The underwriter does the heavy lifting for this due diligence.
As part of the process, an underwriter reviews several key items, including:
- Income and Employment: The underwriter verifies the borrower’s income and employment by reviewing documents like pay stub(s), W-2’s, and tax returns. The underwriter verifies employment by contacting your employer, if you are indeed employed. An explanation — which can often just be a written letter by you — may be requested for gaps in employment, frequent job changes, etc.
- Credit: The underwriter verifies your likelihood to repay the loan by reviewing your credit score and credit history (this includes past foreclosures, bankruptcies, and court judgments). The underwriter will need to verify the amount of revolving and installment debt you have to ensure that you qualify for the loan amount. An explanation — which again, is usually a just written letter by you — may be required for recent delinquencies or inquiries on the credit report.
- Assets: The underwriter verifies if you have sufficient assets for the down payment (if buying) and required reserves by analyzing your bank statements, and other assets that may be liquidated such as mutual funds or retirement accounts. An explanation may be required for large deposits.
- Property: Last but not least, is the property itself! The underwriter will need to analyze the appraisal on your home to confirm the value is supported. Remember, the collateral on a mortgage is the property, so it’s important for the lender to have its reported value supported by an independent professional — the appraiser.
It’s entirely possible that you’ll never interact directly with your underwriter. If he or she needs additional information, you’ll likely hear from your loan officer or your other regular point of contact at the lender.
Automated vs. manual underwriting
Many lenders use automated underwriting systems to streamline their process. The underwriter plugs in your pertinent data—like credit score, loan amount, cash reserves etc.—and the system spits out a recommendation that you be approved or denied.
But the automated system doesn’t always get the final say: Lenders can also manually underwrite loans. Some components of loan eligibility criteria are gray areas that require the underwriter to make a judgement call about your risk as a borrower. Common reasons for manual underwriting include no credit score at all, or an error on your credit report.
Four paths forward
Once the underwriter has completed his or her due diligence, there are three typical results:
- Clear to close: All underwriting and legal conditions have been met. You’ll now move on to the next step in the home buying process (closing).
- Conditional approval: The underwriter has identified one or more issues that need to be resolved before the loan moves forward, such as verifying your employment or proving you have insurance lined up for the new house.
- Denied : If your application does not meet the lender’s requirements, you may be denied.
- Denied with counter-offer : If your application does not meet the lender’s requirements for the particular loan program or terms requested, they may deny your application but offer to extend credit on different terms or for a different program.