What Can Go Wrong During Underwriting? A Comprehensive Guide

The mortgage underwriting process is crucial for homebuyers seeking financing. Underwriting is when the lender thoroughly reviews your financial situation to determine if you qualify for a home loan.

While pre-approval provides an initial assessment underwriting takes a deeper dive. The underwriter analyzes your income assets, liabilities, and credit history. They want to ensure you can repay the mortgage.

Many applications are turned down during the underwriting process, which is a shame. But if you know what to look out for and prepare ahead of time, you can avoid common problems. This comprehensive guide covers .

• What underwriters look for during the review
• The top reasons loans get denied
• Proactive steps to take for underwriting success

What Happens During Underwriting?

Underwriting occurs after your loan application and once all required documents are submitted. The underwriter verifies:

• Income – Using pay stubs, W-2s, tax returns and bank statements. Underwriters want to confirm your income is steady and adequate to make payments.

• Assets – Account statements prove you have funds for the down payment and closing costs. Underwriters check account ownership and source of deposits.

• Credit: Your credit report and score show how well you’ve paid your bills in the past. Derogatory marks like late payments are red flags.

• Liabilities – Documentation for all debts, from credit cards to car loans to alimony, is reviewed. This determines your debt-to-income ratio.

• Collateral: The house is evaluated to make sure it’s worth the price and can properly protect the loan.

Once the underwriter reviews all aspects of your financial situation, a determination is made. Pre-approvals do not guarantee you will clear underwriting!

Top 10 Reasons Mortgage Loans Get Denied

Here are the most common factors that cause loan rejections:

1. Low credit scores – Scores below 620 are considered high-risk. Poor credit indicates potential issues repaying debt.

2. High debt-to-income ratio – Total debt obligations exceeding 50% of gross income raise concerns about affordability.

3. Limited down payment – Small down payments lead to high loan-to-value ratios, increasing risk for lenders.

4. Job changes or gaps – Employment instability causes underwriters to question income continuity.

5. Misrepresentation – Falsified statements or documents make underwriters leery. Honesty is essential.

6. Undisclosed liabilities – Omitting debts artificially lowers your liabilities. Underwriters need the full picture.

7. Appraisal issues – If the home value comes in lower than the purchase price, your loan amount may need adjusting.

8. Insufficient reserves – Many lenders require 3-6 months of mortgage payments available in your accounts.

9. Adverse information – Foreclosures, short sales, judgments or collections in your recent history raise concerns.

10. Inability to verify information – Failure to provide requested documents in a timely manner can delay or derail approval.

As you can see, underwriters analyze both your financial profile and the collateral. Slip-ups in either area could obstruct your home loan.

Tips for A Successful Underwriting Process

Here are some tips for making it through underwriting with flying colors:

• Clean up your credit – Review reports for errors. Pay down balances. Don’t apply for new credit prior to underwriting.

• Pay down existing debts – Reduce your liabilities and debt-to-income ratio.

• Save for a down payment – Larger down payments enable better rates and loan terms.

• Gather paperwork – Have pay stubs, tax returns, and account statements ready to provide quickly.

• Avoid major purchases – Don’t buy cars, furniture, or anything else requiring financing before closing.

• Explain red flags – If your credit or employment history has blemishes, draft letters explaining mitigating circumstances.

• Maintain status quo – Stick with your current job, salary, and living expenses until underwriting completes.

• Communicate changes – Keep your lender/broker informed of any shifts in your situation.

• Respond promptly – Provide requested information ASAP to prevent delays.

• Ask questions – If you don’t understand requests, ask your lender for clarification.

With proper preparation and diligence, you can avoid the stress of denial and get approved with no hiccups.

What To Do If Your Mortgage Gets Denied

If you receive an underwriting denial, stay calm. There are options:

• Identify the reasons – Make sure you understand what criteria you failed to meet.

• Discuss with your lender – Ask if restructuring the loan could help. For example, opting for an FHA loan with a lower down payment requirement.

• Provide additional documentation – If the underwriter lacked necessary documents, supply what’s needed.

• Appeal the decision – You may be able to plead your case, especially if the denial seems unreasonable.

• Improve your financial profile – Use the time to pay down debts, increase your credit score, or save more for a down payment.

• Bring on a co-signer – Adding a co-signer with better credit may compensate for your weaknesses.

• Change lenders – Underwriting requirements vary. Another lender may approve your application.

• Wait and re-apply – After improving your financial standing, try again in 6-12 months.

With persistence, problem-solving, and a proactive approach, an initial denial does not need to derail your homebuying goals forever. Tap your lender’s guidance and remain determined.

The Key Takeaway

Underwriting is a vital checkpoint along the path to mortgage approval. Being aware of the factors underwriters zero in on, and taking steps to optimize those areas, can help your application proceed smoothly.

Open communication, quick response time, and diligent preparation gives you the best shot at underwriting success. Don’t let potential hiccups keep you from achieving your dreams of homeownership. You’ve got this!