There are many different problems that can arise during the mortgage underwriting process. But there are also ways to avoid such problems. The key is to understand how the process the works, and what the underwriter is trying to accomplish. In this article, we will discuss some of the most common underwriting problems that could delay — or even derail — your mortgage loan.
So what is underwriting, anyway? As defined previously, it is a process through which lenders (A) measure the risk associated with a certain borrower and loan, and (B) ensure that the loan complies with the lender’s minimum guidelines. During this process, they also want to ensure the loan meets the minimum requirements of any secondary agencies, such as the FHA, VA or Freddie Mac.
Problems can arise throughout the lending process. But they typically occur during one of three stages:
- Application: Borrowers can encounter issues on the front end, when they first apply for a loan. For instance, a mortgage broker or loan officer might see the applicant’s 520 credit score and deny the loan right away, before the file even reaches the underwriter.
- Underwriting: Problems can also arise during underwriting. In fact, this is where most problems occur, because it’s the most intensive part of the screening process. It is the underwriter’s job to proactively look for problems. So it’s only natural that most issues arise during this stage.
- Closing: Borrowers may also encounter problems on closing day. But these are usually paperwork issues that can be corrected by the escrow / closing agent. Home loans rarely fall through on closing day. Most of the “deal breakers” occur during, or before, the underwriting process.
Read: 5 reasons you could be denied after pre-approval
10 Underwriting Problems That Could Delay, or Derail, Your Mortgage
As you can see above, there are several places where problems can arise. We will focus on the underwriting stage in this article. Here are some of the most common problems that underwriter’s uncover. Some of these problems merely delay the loan from closing. (Note: These items are listed alphabetically, not by importance or frequency.)
- Applicant income — Borrowers need to have sufficient income to qualify for the size of loan they seek. The broker and/or loan officer may check this on the front end. The underwriter will also review income. The lender wants to know if you have the means to repay your mortgage debt, on top of the other debts you currently have. (See “debt-to-income” below for more on this.)
- Cash reserves — Some lenders require borrowers to have additional money in the bank, above and beyond the down payment and closing costs. These funds, known as cash reserves, are intended to cover the first few mortgage payments. This is another common underwriting problem — not enough funds. But it’s important to note that not all lenders have cash-reserve requirements. It varies.
- Credit history — The underwriter will likely check your credit report history to see how you have borrowed money in the past. If the underwriter finds derogatory items such as late payments (covered below), he/she might request a letter of explanation from the borrower. If there is a pattern of such issues, it could derail the loan. These problems are often uncovered during the underwriting stage.
- Debt-to-income — Having too much debt is a common problem revealed by underwriting. In some cases, this kind of issue will get past the broker or loan officer, only to surface when the underwriter reviews the application file. Lender’s measure this requirement by using the debt-to-income ratio, or DTI. This is a comparison between the amount of money you earn, and the amount you spend on your various debts. These days, many lenders (and their underwriters) set the maximum total DTI ratio somewhere between 36% and 43%. You can learn more about income percentages here.
- Employment history — Different lenders have different requirements for employment. The rule of thumb is that borrowers must have at least two consecutive years of employment, in order to qualify for a mortgage. But this is not a hard-and-fast rule. There are exceptions. If the underwriter determines that the borrower falls short of the lender’s employment requirements, it could lead to problems. In the best-case scenario, the underwriter will simply require a letter of explanation. In the worst-case scenario, the loan will be denied during the underwriting stage.
- Funds not sourced or seasoned — Another common underwriting problem occurs when the money set aside for the down payment cannot be properly sourced. This means the underwriter cannot determine where the money came from. The lender may also require the funds to be “seasoned,” which means they have been in the bank for a certain length of time. Both of these can cause issues during the underwriting stage. Learn more about sourced and seasoned funds.
- Low appraisal — Before they can approve a loan, mortgage lenders need to ensure the home is worth the amount the buyer has agreed to pay. So they’ll send a licensed appraiser to determine the current market value of the property. A low appraisal can create problems during the underwriting process. This is when the home appraises for less than the purchase price. In cases of a low appraisal, the seller can lower the sale price or the buyer can pay the difference out of pocket (not always wise). If the two parties cannot find common ground, the mortgage may be denied in underwriting.
- Low equity — This problem applies to homeowners who are trying to refinance an existing mortgage. According to Mike Lyon, vice president of operations at Quicken Loans: “the number one reason for suspense, without question, is collateral. It dwarfs every other reason. Simply put, many clients think that their home is worth more than others in their neighborhood.”
- Missing documents — Document-related problems typically do not derail mortgages, in and of themselves. But they can delay the closing process. So it’s important that you provided all of the requested documents in a timely fashion, and in their entirety. Bank statements are a good example. Lenders typically request an official bank statement, which means it must come from the bank. Homeowners who provide computer printouts, or incomplete statements with missing pages, can prolong underwriting and delay the closing.
- Pattern of late payments — This is an extension of the “credit history” underwriting problem mentioned earlier. But it is both a common and potentially serious problem, so it deserves extra focus. Having a history of late payments on past credit accounts (credit cards, student loans, mortgages, etc.) will seriously harm your chances of getting approved for the loan. It lowers your credit score and makes you a bigger risk, from the lender’s perspective.
These are certainly not the only things that can go wrong during the mortgage underwriting process. They are just some of the most common problems that plague borrowers seeking a home loan. If you can avoid all or most of the problems on this list, there is a good chance you’ll get the much-sought-after “clear to close” stamp from the underwriter. And then it’s on to the closing!