Your loan officer can make it look easy. But getting a loan across the finish line and underwritten is a complex process.
As a homeowner in waiting, you may experience stress as your mortgage lending team works tirelessly to carry out the process of finalizing the loan, which is known as underwriting.
This process is an evaluation of monetary risks. Underwriters will research the borrower’s financial record to assess the risk the lender will assume once the loan is executed.
Here’s how underwriters go about their work to determine whether the applicant is approved for a loan.
Remember the three “Cs” of underwriting: credit, capacity and collateral.
Underwriters will analyze credit scores and credit history. By taking a close look at the amount of debt and the applicant’s reliability of making on-time payments, the underwriter can extrapolate the likelihood of the applicant’s ability to also make good on the mortgage payments.
Capacity refers to the borrower’s debt-to-income ratio. Borrowers with heavier debt loads are considered to have smaller capacity. This ratio represents how much an applicant can spend in relation to their income. Underwriters will get a precise reading of this ratio before making a decision.
During the underwriting process, collateral must be established in the event of a loan default. The underwriter will make sure that the borrower will be able to cover the amount of the interest in the acquired property, which can be used to guarantee collateral.
An appraisal of the property gives the lender a very good idea on the home’s condition and value, which will also help determine the home’s collateral.
The final stage: a decision
Once the lender has gone through all the financial details with a fine-tooth comb, it’s time to make a decision.
Denied — If an applicant is denied, it’s important for them to follow up and ask the lender for specific reasons as to why. Maybe it’s too much debt or a less than stellar credit report. Whatever the reason, it’s valuable to understand why. The lessons will build a stronger application for the next time you apply.
Approved — This is obviously the ideal outcome. If you provided all the necessary paperwork and passed financial scrutiny, you’ll be approved for your loan and will only have to do additional paperwork before closing on the loan.
Conditional approval — This loan status may not be difficult to resolve. In many cases, a conditional approval is a matter of administrative adjustments. The underwriter might just need a paystub or one more income confirmation.
Suspended — An incomplete application with missing documents can lead to this status. Without the proper paperwork, it’ll be impossible for the underwriter to determine risks and approve the loan. By following instructions and providing documents as requested, borrowers will not have to worry about this status.
Once you’re approved, it’ll be time to close the loan. This requires additional paperwork and signatures, but it also signifies the light at the end of the borrowing tunnel.