Most people who buy a home take out a mortgage to finance the purchase. There is an approval process called underwriting that stands between a borrower wanting a property and them being able to pay for it. Letâs dive in and learn more about underwriting and how it works.
Underwriting is the process your mortgage lender goes through to evaluate your assets, debt, credit and property details. Underwriting is a way for lenders to mitigate risk by making sure borrowers can afford to repay their mortgages. They also determine if the home will be worth enough to cover the mortgage loan should the borrower default. Â Underwriting dictates whether an individual gets final loan approval.
Applying for a mortgage can be an intimidating process As an applicant, you want to present yourself in the best light possible to increase your chances of approval One common area of concern is how underwriters view late payments when evaluating mortgage applications.
In this comprehensive guide, we will examine:
- What underwriters look for when assessing late payments
- How recent late payments impact mortgage approvals
- Strategies for overcoming credit challenges from late payments
- FAQs on underwriters and late payments
Arm yourself with knowledge so you can navigate the mortgage process with confidence
What Do Underwriters Look For When Assessing Late Payments?
When underwriters look over your mortgage application, they carefully look at your payment history. Late payments are a red flag that can make it harder to get a loan. Here are key factors underwriters consider:
Timing of the Late Payments
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Recent late payments (within the past 12 months) are most concerning and can indicate current financial instability.
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Older late payments (from more than a year ago) don’t have as much of an effect because they don’t show as much about how the person will act in the future.
Frequency of Late Payments
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One-time late payment may be excused with a valid explanation.
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Multiple late payments in the last year are more of a problem, and you may have to wait before getting a mortgage.
Magnitude of the Late Payments
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Minor 30-day lates are less severe than major 60+ day lates which can significantly damage your credit.
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Underwriters dig deeper into the reasons behind major delinquencies.
How Recent Late Payments Impact Mortgage Approval
Mortgage lenders pay extra attention to how well you’ve paid your bills in the last 12 months. Here’s why this timeframe is so critical:
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Recency matters – recent late payments may indicate current financial instability in the eyes of underwriters.
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Predictive value – underwriters view past behavior as a predictor of future repayment behavior. Can you reliably make monthly mortgage payments on time?
However, there are some exceptions:
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One-time late – a single blip may be excused with a valid reason and otherwise solid payment history.
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Multiple lates – more than one late in 12 months can be a deal-breaker with traditional lending. specialized mortgage programs may provide more flexibility.
Strategies for Overcoming Credit Challenges from Late Payments
If you have recent late payments, don’t lose hope. You may still be able to get approved with the right approach:
Provide a Letter of Explanation
Detail the circumstances that led to the late payments and the steps you’ve taken to resolve those issues. This context can help justify the lates.
Explore Specialized Mortgage Programs
Certain non-QM loans offer more flexible credit requirements for borrowers overcoming past issues like late payments. These loans balance risk with customized qualification standards.
Wait and Rebuild Your Credit
If late payments are too recent, taking 6-12 months to re-establish your credit with on-time payments can set you on stronger footing for mortgage approval later.
FAQs About Underwriters and Late Payments
How many late payments are allowed on a mortgage application?
Most lenders allow no late payments in the past 12 months. But specialized lenders may permit one or more with proper justification.
What if I have major delinquencies older than 12 months?
Older major delinquencies like 90+ day lates may still raise questions. Be prepared to explain the circumstances and your ability to manage credit responsibly now.
Do medical collections and late payments affect mortgage approval differently?
Yes. Underwriters are more lenient on medical collections and lates with extenuating circumstances like health issues or job loss. Non-medical lates draw more scrutiny.
Can late payments lead to a mortgage denial?
Absolutely. Multiple recent late payments that suggest financial irresponsibility can be grounds for denial. That’s why choosing the right lender and providing context on lates are key.
If I was late on mortgage payments with another lender, will that impact my new application?
Yes. Any history of mortgage delinquencies must be disclosed and can influence new mortgage approvals. Be upfront about past mortgage lates.
The Bottom Line
Late payments can pose challenges on a mortgage application, but they are not an automatic denial. Being transparent, choosing the right lender, and taking steps to improve your credit can help overcome credit stumbles from past late payments. With persistence and the proper strategy, mortgage approval is achievable even if you have some lates in your history.
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How The Mortgage Underwriting Process Works
The mortgage underwriting process is the step-by-step evaluation of a borrowerâs financial and credit profile to determine their eligibility for a mortgage loan. What do mortgage underwriters look for? As we’ve already talked about, they figure out how risky a borrower is to a potential lender by carefully checking their income, property, assets, and credit. These are key pillars of any mortgage approval.
Underwriters will confirm a borrowerâs income and verify employment. There are three types of forms a lender will typically ask for and require verifying a borrowerâs income:
- W-2s from the last 2 years
- Two most recent pay stubs
- Two most recent bank statements
If a borrower is self-employed or owns more than 25% of a business, the lender will need different paperwork. The requirements may vary depending on the type of loan a borrower is applying for, the lenderâs policies and the borrowerâs financial situation. These are some of the documents commonly requested:
- K-1s
- Balance sheets
- Profit and loss statements
- Business and personal tax returns
While the underwriting process is happening, the lender will order an appraisal, typically conducted by a licensed appraiser, to assess and evaluate the property a borrower wishes to purchase. This is done to make sure that the loan amount given for the house is the same as its value, which is also called its “fair market value.” This is often required when refinancing if the value cannot be verified another way and is always required for home purchases.
During the underwriting process, underwriters will also look at documentation to verify your assets, such as checking and savings accounts, stocks, bonds and proceeds from the sale of tangible items. They ensure that the borrower has the funds necessary to make the down payment, cover closing costs and make mortgage payments.
Underwriters take a close look at a borrowerâs credit history by pulling a credit report. During a credit check, underwriters look for important factors that can indicate a borrowerâs creditworthiness and ability to repay the loan. They look at a borrowerâs overall credit score and search for things like late payments, bankruptcies, overuse of credit and more. Underwriters will also look at any outstanding debt and calculate a borrowerâs DTI.