Investment Glossary – Mortgage Underwriting

You want to buy a home. You don’t have enough money to pay for it on your own. So you go and apply for a mortgage, which is a loan that a bank or other lender makes to you, using the home as collateral. How do they go about deciding whether you are the right person to lend hundreds of thousands of dollars to? If you answered, “The mortgage underwriting process, of course!” – you’re right. And now you can come on down while we explain what mortgage underwriting is and isn’t.

So what do mortgage underwriters look at to determine if you’re a good loan risk or not? Tons of information. They want to make sure they leave no stone unturned since a borrower defaulting on a loan is expensive for the bank, both in terms of dealing with a property that the bank now owns and has to sell, along with the fact that they aren’t earning the interest they thought they’d be earning on your mortgage. So here are some of the basic things they look at:

      • Income – They want to know how much you make, how much your income varies from year to year, if any of it consists of unguaranteed bonuses or commissions, if you are a part-time Uber driver now driving less – they want to know everything. Your ability to pay a loan is directly tied to your ability to maintain or grow your income over time.
      • Credit History – Have you defaulted on a loan (or multiple loans) previously? Do you pay on time, every time? Have you ever had to go on a payment plan? Your past credit behavior can be indicative of how you may treat your mortgage in the future.
      • Current Borrowing Levels – Banks want to know your current debt-to-income ratio, because they know that when that ratio exceeds certain levels, you are less likely to repay your loan. So if you’re making $60,000 a year, there’s a good reason why the bank isn’t going to lend you $2 million dollars. You’re not likely to be able to make those payments.

Those are just the basic things mortgage underwriters look at when they review your loan application. They’ll also order appraisals on the property, check the title of the property to ensure it is clear, identify and confirm the sources of your down payment, verify your employment (on my last home purchase, the lender called my employer no fewer than four times to make sure I was still employed), and ensure that they know everything they can about your potential property and you. If you’ve done a mortgage preapproval, your lender has likely undertaken some of the steps to begin with, but not at the same level of detail as a final mortgage underwriting.

Mortgage underwriting is not necessarily a straightforward process. Your lender will likely come back with questions at multiple points. Do not take them personally. If someone wanted to borrow hundreds of thousands of dollars from you, you would probably do a bit of research to make sure you’d get it back. Expect to hear questions on anything that you submit to a lender, not because they don’t trust you, but because they don’t know you and need to establish a baseline level of comfort with you and your financial situation. Underwriting can be stressful, but if you have your financial picture in good shape heading in and know how much home you can afford, you’ll be able to make it a far more manageable process than if you went in blind and unprepared.