What is the Role of an Underwriter?
When you're applying for a mortgage it's natural to think of your lender as the one that makes the final decision. After all he's the one that takes your paperwork, works with you to ensure everything is filled out correctly and gets a commission when your mortgage goes through.
But, that’s not the whole story.
While your agent helps guide you through the process, it is actually the underwriter that makes the final decision on whether you get a loan.
So who is this person? And how do you get him or her to say yes to your mortgage?
What does an underwriter do?
The job of an underwriter is to review four areas. These areas are:
Ace these four pillars (commonly referred to as IPAC) and your underwriter will approve you for a mortgage.
Evaluates Income and Property
The first two areas, income and property, are where your underwriter will look to determine if the property you are buying is one that you can afford and one that meets the standards of the loan.
You'll need to provide up to two years worth of W-2s, as well as your last two pay stubs and bank statements.
If you own your own business, it becomes a bit more challenging. You can expect an underwriter to be more thorough and require a lot more paperwork.
A word on home appraisals
When analyzing your income and the property you wish to buy, the underwriter will also make a determination to see if the value of your future home meets the value of the loan. Thus an appraisal will be ordered. This is done to ensure that the loan amount isn’t more than the home’s value.
There have been many loans that fail to meet this requirement because the seller has valued the house too high. Even if you wish to proceed knowing that you're willing to pay more than the appraised value, an underwriter will likely not allow the loan to happen. This is because, should you foreclose, it’s a guaranteed loss for the lender.
Evaluates Assets and Credit
The next two pillars of underwriting are assets and credit. These include everything you own and everything you owe. Assets include savings such as retirement funds, bonds, stocks, other properties, as well as how much you have in your bank account. The more assets you have, and the more assets you have paid off, the better.
When an underwriter is evaluating your credit they're going to take a good hard look at it. This is not just a quick glance at your credit score but an evaluation of your debt-to-income ratio. The higher your income and assets are against your monthly bills, the more likely you are to get a mortgage with good terms. The underwriter does a lot of math to come to these conclusions, but basically if your debt exceeds 41% of your income then you are less likely to get a loan.
How do you prepare for an underwriter?
Long before you apply for a loan is the short answer.
Unlike your mortgage broker, you aren’t going to be able to negotiate with an underwriter. Like a Kafka novel, underwriters stay behind the scenes while determining your fate. The best that you can do is to prepare yourself by eliminating any chance that they will refuse your loan.
Do this by:
Having a consistent income
Paying off your debts to lower your DTI
Increasing your assets when and where you can
All in all, math is the only thing an underwriter understands, so make sure yours adds up. Do this long before you ever apply for a mortgage, and you’ll be fine.
Conclusion: If you've gotten far enough to put an offer on a house, don't worry about it.
If there’s a problem, it’s likely not going to come down to you, but the house itself (which, of course, you can’t do anything about). So don’t worry. As Newt Scamander once said, “If you worry, you suffer twice.”