What do underwriters do and what do they look for when reviewing loan applications? Check out this comprehensive guide to answer those questions and more. Table of Contents.
Giving loans to your customers usually takes a lot of screening and even more paperwork, which means it takes a lot of your time.
Professional underwriters look into a borrower’s financial history to see if they can repay the loans they’ve applied for. This makes things easier for lenders.
The underwriters unbiased opinion gives you a clear picture of the borrowers financial situation and their potential risk before recommending whether to grant the loan.
What do underwriters do and what do they look for in loan applications? Keep reading to find out.
Getting a new mortgage can help you lower your interest rate, shorten the length of your loan, or use the value of your home to your advantage. But before you can get those benefits, an underwriter has to agree to your refinancing request.
As the gatekeeper of the mortgage process, the underwriter carefully examines your finances to determine if you qualify for the refinanced loan. So what exactly do they look for when assessing your refinance application?
In this comprehensive guide, we’ll explore the key factors underwriters evaluate to decide whether or not to approve your refinance.
Overview of the Underwriting Process
Before diving into the specifics, let’s quickly recap how underwriting works in the refinance process:
-
You submit a refinance application: This provides details on your income, assets, debts, credit history and the property.
-
The underwriter reviews your finances: They verify your financial information and analyze your creditworthiness.
-
The underwriter makes a decision: Based on their assessment, they will approve, deny or suspend your application.
-
You can close on the refinance if it’s approved. You can close on the new mortgage after the loan documents are signed.
So in essence, the underwriter determines if you qualify for the refinanced loan based on your financial profile and risk factors. Now, let’s explore those key factors.
1. Your Credit History
Your credit history is one of the first things an underwriter will look at because it shows how well you’ve handled debts in the past. Several aspects of your credit profile are closely analyzed:
Credit Score
Your credit score gives the underwriter a quick snapshot of your creditworthiness. The higher your score, the lower risk you pose to the lender. A minimum score of 620 is recommended for refinance approval, but scores of 700+ are ideal.
Payment History
Your track record of making payments on time is pivotal. Underwriters want to see a history of on-time payments with no lateness, collections or charge-offs. Even one or two late payments could raise concerns and require further explanation.
Debt-to-Income Ratio
This ratio compares your monthly debt payments to your gross monthly income. A lower percentage indicates you can better handle additional debt. Underwriters typically look for a ratio below 50%.
Credit Inquiries
If you have had too many recent loan or credit applications, it can be a red flag for underwriters. It could mean you’re desperately trying to get credit or borrowing more than you can afford.
2. Your Income and Employment
Underwriters need to verify you have the means to repay the refinanced mortgage. So they’ll closely evaluate your income sources and employment status, including:
Income Documentation
You’ll need to provide documentation to validate your income, such as recent paystubs, W-2s, tax returns, and bank statements showing deposit activity. Underwriters will analyze these to confirm your income.
Income Stability
Having a stable income history with the same employer is ideal. Frequent job changes or employment gaps require further explanation and can impact your approval. Underwriters look for consistency.
Sufficient Income
Naturally, your income needs to be adequate to cover existing debts plus the new mortgage payment. Underwriters may request updated bank statements or paystubs to re-verify this prior to final approval.
3. The Mortgaged Property
The home you want to refinance serves as collateral for the loan, so underwriters carefully assess its value and viability as security for repayment. This involves looking at:
Property Appraisal
An appraisal from a licensed professional determines the home’s fair market value. Underwriters want to ensure the loan amount aligns with the appraised value. If not, additional funds or a lower loan amount may be required.
Loan-to-Value Ratio
This ratio compares the loan amount to the appraised home value. The lower the percentage, the less risk for the lender. Most lenders require 20-22% equity for a refinance.
Title Search
A title search verifies you legally own the home and there are no other claims on the property. Underwriters want to confirm clean title before approving your refinance.
Additional Factors Underwriters May Review
Along with the major items above, here are some other details underwriters often look at:
-
Reserves: Liquid assets like savings that could cover a few months of payments if you lost income.
-
Mortgage payment history: Any late mortgage payments on the current loan may need to be explained.
-
Debt balances: Too much outstanding revolving debt can impact approval, even with good credit scores.
-
Property type: Unique properties like manufactured homes or co-ops may have specialized underwriting requirements.
-
Loan program: Specific refinance loan programs like FHA and VA have their own underwriting guidelines.
Tips for a Smooth Underwriting Process
While underwriters do their diligent financial vetting, here are some tips to make sure your refinance sails through underwriting:
-
Provide all required documents upfront to avoid delays. This includes bank statements, tax returns, and income/employment verification.
-
Explain any red flags or discrepancies on your credit report or bank statements so underwriters understand the full context.
-
Maintain your current income, debts, and credit profile until approved. Major changes can impact underwriting.
-
Respond promptly if underwriters request any additional documentation or explanations.
-
Ask your loan officer if you have any questions about the underwriting requirements.
The Bottom Line
Underwriting for a refinance primarily focuses on your creditworthiness, income stability, and the value of the home. By understanding what underwriters look for, you can take steps to put your best foot forward and maximize your chances of approval. With proper preparation and diligent document gathering, your refinance should clear underwriting with ease.
Stages of the underwriting process
The underwriting process involves several stages, including:
- Pre-qualifying the borrower for the loan
- Receiving the borrowers completed loan application
- Verifying the borrowers income and assets
- Conducting appraisals
- Submitting underwriting decisions
To put all this into perspective, heres an overview of each of these stages before an underwriter submits their lending decision.
This initial stage involves evaluating the borrowers eligibility for a loan based on their financial history and creditworthiness. The borrower will submit documents about their:
The underwriter will review the borrowers financial profile and run a credit check. However, this stage is simply an indication that the borrower could be approved for a loan, and additional paperwork may be required upon pre-approvalâprovided the borrowers situation doesnt change.
At this stage, the borrower has been pre-qualified and will need to complete and submit a loan application.
On the application, the borrower will include more detailed information about their finances, including their assets, debts, employment, and credit history.
The next step is to check and confirm the borrowers financial status, verifying the accuracy of the information on the financial documents they provideâincluding bank account statements and tax returns.
Underwriters will also consider assets, such as money in bank or investment accounts, retirement savings, stock ownerships, cash value of insurance policies, and more.
If deemed qualified, the lender will issue a pre-approval letter stating the amount theyre willing to extend to the borrower based on their financials.
Once the underwriter verifies the borrowers information, theyll determine if they meet the lenders criteria by evaluating financial factors, including their credit score and debt-to-income ratio.
In the case of a mortgage loan application, the underwriter will appraise the property to assess whether the amount they plan to pay matches the houses condition and other homes in the vicinity. Theyll also conduct title searches through a title company to check whether there are legal claims on the property and ensure its transferable.
Based on the underwriters analysis, the lender will deliver one of these decisions:
- Approved: Give the borrower a loan offer with terms and conditions. Sometimes lenders can give conditional approvals asking for additional documentation like pay stubs, proof of insurance, tax forms, and more.
- Denied: Deny the borrower the loan for various reasons, such as too much risk.
- Suspended: A decision to suspend might mean some of the borrowers information is missing and/or wasnt verifiable. In such cases, the lender can advise the borrower how to reactivate their application.
The final step is closing day when the lender funds the borrowers loan and any pending closing costs are settled.
This brings us to the next thing: what documents do underwriters review and why? Lets look at the relevant documents an underwriter looks for throughout the underwriting process.
What do underwriters look for in loan applications?
Consumers are taking out more loans, particularly after the pandemic.
LendingTree found that personal loan growth spiked by 15.2% in 2021 after dropping 7.6% in 2020. In addition, mortgages make up 72.7% of the total consumer debt while personal loans make up the smallest sliverâa little over 1%.
This shows the extent of consumers borrowing appetite to finance their purchases, which is why lenders subject them to the underwriting process.
But what, exactly, do underwriters look for when reviewing a borrowers loan application and financial documents?
Simply put, they want to know the person can repay the loan. So, they find a borrower with the lowest possible defaulting risk.
A low-risk borrower has a higher chance of getting their loan approved with better terms like higher loan limit or lower interest rates. High-risk borrowers may qualify for smaller loans at higher interest rates or risk denial altogether.
To understand how underwriters determine the potential risk a borrower poses, heres what they look for in their evaluation.
Underwriters want to know how much a borrower makes and how often. Typically, theyll ask the applicant to provide:
- W-2 forms
- Recent pay stubs
- Leave and earnings statements
- Recent bank statements
- Federal income tax returns (for self-employed or business owners)
W-2s from the last two years, along with two most recent pay stubs and bank statements, help underwriters evaluate a borrowers finances and past credit decisions. It also determines whether the borrower has enough money to cover monthly loan repayments.
Self-employed customers or those with a sizable share in a company will furnish profit and loss sheets, balance sheets, K-1s, and their personal and business tax returns. The underwriter can verify the borrowers income and employment situation from these documents.
When a borrower applies for a loan, evaluating their two months of recent bank statements verifies they can pay the down payment, closing costs, and mortgage payments. If the statements have no issues, the lender is likely to approve the loan.
However, there are certain red flags that underwriters check for, such as:
- Insufficient funds fees
- Bounced checks
- Large, undocumented deposits
- Monthly payments to non-disclosed or individual credit accounts
Bank statements arent just for personal savings accounts but checking, money market, and any other accounts holding funds the borrower will use to qualify for the loan.
Like underwriters, loan officers also scrutinize these bank statements to verify the borrowers savings and cash flow check for unusual activity, and recent debts.
Underwriters also review the borrowers assets to ensure they can make payments on their loans. The assets can help the borrower secure a loan approval because the lender can sell the property for cash if they default on their payments.
Some things underwriters might view include:
- Savings and checking accounts
- Stocks
- Personal property
- Real estate
A good credit score helps underwriters determine how much to lend to the borrower, the repayment period, and interest rate. A high score (ranging from 740 to 800 and higher) makes the borrower look dependable and less risky in the lenders eyes.
Credit scores are based on several factors about the borrower, including their:
- Payment history
- Types of credit
- Credit account
- Credit usage
- New credit line inquiries
Underwriters also look at the borrowers employment status and/or history. If employed, this evaluation will indicate any gaps in the persons employment history. Frequent job changesâwhich may be deemed red flagsâmay result in a request for further explanations or detailed work history.
A self-employed person may be required to have enough savings to cover several months of payments as a buffer.
Underwriters also look at the borrowers credit history, reviewing documents like W-2 forms to verify their employment history and status. Theyll also look at:
- Bank statements
- Tax statements
- CashflowÂ
- Assets
- Checking and savings accounts
- Stock ownership
- Personal property
- Real estate
- Late payment history
- Bankruptcies
- Liabilities
- Alimony or child support
Underwriters also review the borrowers debt-to-income ratio (DTI), which is a percentage estimate of the minimum monthly debt payments over gross income per month. That way, they can see how well the borrower manages debts each month.
A high percentage shows a higher risk of defaulting on loans. Typically, lenders prefer a DTI of up to 45% or 50% (in some cases) on the borrowers revolving accounts and regular scheduled expenses like car payments, credit cards, or monthly mortgage payments.
Underwriters calculate a borrowers loan-to-value (LTV) ratio by dividing the loan amount by the asset value, then multiplying by 100 to get a percentage.
For instance, if a borrower wants to buy a home appraised at $750,000 and the loan is $600,000, the LTV is 80%. The LTV ratio usually drops as the borrower repays the loan, but the higher it is, the riskier the borrower is to the lender.
To gain a more comprehensive understanding of a borrowers financial history, underwriters may also require them to provide other pieces of information. For instance, legal documents verifying child support, alimony, or other court-ordered debt may be useful in completing the loan underwriting process.
They can also request for court orders, divorce decrees, letters from friends of the court, or other paperwork that may impact the borrowers overall financial situation as they review their application.
WHAT DOES AN UNDERWRITER LOOK FOR IN A LOAN APPROVAL❓
FAQ
What is underwriting in a mortgage refinancing?
Underwriting is the thorough assessment of a borrower’s financial state, creditworthiness, and the property being refinanced throughout the mortgage refinancing process to decide whether they are eligible for a new mortgage loan and what terms and conditions will be associated with that loan.
What does a mortgage underwriter look for?
A mortgage underwriter is the person that approves or denies your loan application. Let’s discuss what underwriters look for in the loan approval process. When they look at your application, they look at many things, such as your income, credit history, and any debts you have.
What do underwriters look for in the loan approval process?
Let’s discuss what underwriters look for in the loan approval process. When they look at your application, they look at many things, such as your income, credit history, and any debts you have. This important step in the process focuses on the three C’s of underwriting — credit, capacity and collateral.
What is initial and final underwriting in a mortgage refinancing?
Initial and final underwriting are the two steps of the mortgage refinancing process that are generally included in it. The underwriter examines the application and supporting documents to determine whether the borrower satisfies the key eligibility requirements.
What is a mortgage underwriting process?
The mortgage underwriting process is the step-by-step evaluation of a borrower’s financial and credit profile to determine their eligibility for a mortgage loan. What are underwriters looking for?.
Why do investors need a mortgage underwriting process?
Investors benefit from the vetting process that underwriting provides and its ability to make an informed investment decision. The mortgage underwriting process is the step-by-step evaluation of a borrower’s financial and credit profile to determine their eligibility for a mortgage loan.
What are the 3 C’s of underwriting?
This important step in the process focuses on the three C’s of underwriting — credit, capacity and collateral.
What will make an underwriter deny a loan?
… reject mortgages often involve credit score issues, income shortfalls, high LTV ratios, property type or recent changes in your financial situationJan 31, 2025.
Does an appraiser go inside the house for a refinance?
Depending on your reason for refinancing and the amount of equity in your home, your lender may order a full, in-person appraisal. Apr 12, 2024.
How long does it take an underwriter to approve a refinance?
How Long Does It Take for a Refinance Approval? Approval typically takes a few days to a week, depending on the complexity of your financial situation. Oct 3, 2024.