Underwriting, demystified

The short version

Underwriting is the lender's review of a loan before it makes a decision. As a broker, I send your file to the lender, and the lender's underwriter makes the credit decision. My part is getting the file there complete and working through what the underwriter asks for.

What the underwriter looks at

For many loans, the file first goes through an automated underwriting system. Then the underwriter verifies:

• income, in the way the program requires
• assets, such as the money for the down payment and closing costs
• credit, and the debts already being paid
• the property, generally through an appraisal, and the title work

Where a pre-approval fits

Underwriting can start before a home is chosen. I issue a pre-approval letter only after two things: I've reviewed the documents I asked for, and an underwriting decision has come back, automated or manual. The credit decision itself stays with the lender's underwriter.

A pre-approval letter isn't a final approval or a commitment to lend. The home (generally through an appraisal), the title and any changes in your finances are still reviewed before closing.

Debt-to-income

One measure many programs use is debt-to-income. It compares monthly debts, including the new housing payment, with gross monthly income. Limits vary by program and credit.

Conditions are normal

When a file is approved, it's usually a conditional approval: the lender's decision, with a list of conditions to clear before closing. Typical conditions are an updated bank statement, a letter explaining a credit inquiry, or the source of a large deposit.

A common belief is that being asked for more documents means something's wrong. It usually doesn't. A conditional approval with a list of conditions is the normal path, not a warning sign.

Clear to close

Once every condition is cleared, the file is "clear to close". On most home loans, the Closing Disclosure arrives before closing, with time to compare it with the Loan Estimate.

Keeping it moving

Upload what's asked for, complete, through the secure website rather than sending it by email. If something is about to change, such as a new job, new credit, or a large deposit or withdrawal, tell me first if you can. Each of those can change the file the lender is reviewing.

From the Home Express Mortgage Guarantee: "You get personal status updates on approval progress through closing."

From the source

The CFPB walks through the home-buying process, including underwriting and closing, on its own site:

• CFPB: Buying a house

Words in this lesson