Mortgage underwriters deny about one in every 10 mortgage loan applications. This is often because the applicant has too much debt, a spotty employment history, or a low appraisal report. However, by knowing what an underwriter reviews, you can make your application as attractive as possible.
Home buying requires your financial situation to be checked and rechecked multiple times. While it may be frustrating, it makes sense; not everyone can be trusted to borrow hundreds of thousands of dollars.
One of the people who determine this trust is the mortgage underwriter. When you apply for a mortgage loan, your loan application ultimately lands at an underwriter’s desk. A mortgage underwriter decides whether you are trustworthy enough to pay back your loan by reviewing how you handled money before. This is a fairly objective decision, but is there a way to prepare?
In this article, we’ll review the underwriting process, what an underwriter may look for in a mortgage application, and how to put your best foot forward.
How often do underwriters deny mortgages?
How many people get denied in underwriting? According to 2020 data from the Consumer Financial Protection Bureau, 9.3% of applications to buy a new house are denied and 13.2% of applications to refinance a house are denied.
Again, let’s be practical. Real estate brokers, mortgage brokers, banks, and other lenders realize people pay fees when applying for a mortgage. They want to be confident the potential buyer will get approved before they get the process started. The buyer also wants this since they’re paying mortgage application fees.
How many mortgage lenders should you apply to?
Although it is impossible to know for sure whether an underwriter will approve your application, you can get a feel of how likely you are to get a loan during the prequalification and preapproval stages. Are you just within the eligibility requirements of the lender? Would a small change in your credit score, income, or debt levels jeopardize your chances? If the answer is yes, you may have a better chance with another lender.
In any case, it is a good idea to apply with five or more lenders when searching for financing. This way you will be confident you are getting the best rate and terms possible for your situation.
Why do underwriters deny mortgage applications?
There are practical reasons why a bank decides it doesn’t want to lend money to you. Here are some common reasons.
Your credit score is too low
This one is pretty obvious. The bank doesn’t want to take you on as a borrower because you have a dismal record of making payments on time. You have student loan debt, credit card debt, or auto loan debts. You miss these payments or make late payments. They don’t like your credit history.
Debt-to-income ratio is too high
Your debt-to-income (DTI) ratio looks at how much of your monthly salary pays credit cards, student loans, and other debt. The underwriter wants to know what this picture will look like when you take on these additional mortgage payments. Statistically, they want to see a ratio under 50%.
Before you get rejected, calculate your DTI. If it’s over 50%, there’s a good chance the underwriter will reject your mortgage application.
The loan-to-value ratio (LTV) is too high
Once you agree to purchase a house, you hand over the down payment and the bank loans the rest as a mortgage. The bank may think you aren’t putting in enough of your own money and they are taking all the risk. They want you to have more “skin in the game.”
Employment status recently changed
Banks and other lenders want to give mortgages to boring people. They like people who have the same job with the same company for years. If you recently changed companies or lost your job, that may be a problem.
Unusual bank account activity
Once again, banks like boring people. If your bank balance jumped just before you applied for the mortgage, they will ask where the money came from and how long will it be in the account.
Problems with the property
Why do buyers get home inspections done by qualified appraisers? Because they want to uncover any serious structural problems or any issues with the title. If there are, it might cost a lot to fix these problems. Your lender won’t like this, and the underwriter may deny your application.
History of missed mortgage payments
In the investing world, people say, “Past performance is no guarantee of future results.” This isn’t the case in the lending world, where lenders think your previous history of making or missing mortgage payments is a very good indicator of your future behavior.
If you’ve had a bankruptcy, had your property foreclosed, or sold it through a short date, you will have serious problems getting a mortgage loan.
The appraisal is too low
You came out on top in a bidding war. Unfortunately, you are about to set a record for the highest price paid in that neighborhood. The lender doesn’t share your passion.
What do I do after getting my results?
After the underwriter considers all of the above information, he or she will decide whether you get the mortgage loan. This could be good news or bad news.
- The good news. This means you received “conditional approval,” and the lender will continue digging and verifying everything. Make the process as easy as possible for them. If they are missing a vital piece of paperwork, they will set your loan application aside and work on someone else’s. Get them everything you can provide in a timely manner. Banks hate surprises. Don’t quit your job or take on lots of other debt.
- The bad news. This means your loan application was rejected. Why? Find the reason. Save up for a higher down payment. Spend the next several months paying bills on time. Pay down your credit cards.
Can a loan fall through during the underwriting process?
Yes. The lender doesn’t like the information they have gathered when digging deeper or there has been a significant change, like the borrower losing their job.
Can I prevent getting rejected?
What can you do to improve your chances of getting approved? It’s similar to cramming for exams at school. You don’t just wing it.
- Co-signer. Will your parents co-sign the loan? You have a good job. They have good credit. If they co-sign, they are assuming responsibility if you mess up. The bank likes that.
- Revaluate your choice. It’s tempting to buy the biggest house you can afford, but maybe it’s time to think smaller. Banks don’t like stretch goals. If the preliminary numbers say you can apply for a bigger mortgage, go for a smaller one.
- Be prepared. Have everything the bank would need for the underwriting approval process. When the loan officer says, “Here’s what we need,” you can say, “I’ve got it all here.”
Is no news good news in underwriting?
No, it’s not. The process might be stuck because the underwriter is waiting on documentation. Your loan officer should be your point of contact.
What should you not do during underwriting?
Don’t take on large amounts of debt, quit your job, miss bill payments or anything else to negatively impact your credit score.
What do mortgage underwriters look at?
Because underwriters are responsible for ensuring you can handle a mortgage loan, the process itself is long and thorough. Below you’ll find what underwriters review, the questions they may ask about your lifestyle, and the documents or reports you need to provide to your information.
|Employment and income|
|Credit report and score|
What’s the difference between an underwriter and a lender?
Mortgage loans require a lot of oversight, and a loan passes through many hands before it winds up in your bank account. Two of the most important people in this process are the lender and mortgage underwriter.
- Lender. This is the person or financial institution that actually finances the loan and assumes the financial risk of a mortgage.
- Underwriter. To ensure the lender doesn’t take on a bad deal, the underwriter reviews the borrower’s background and financial history.
What is the mortgage underwriting process?
Lenders want to make sure you’ll repay the loan they give you, and they want to be very sure. To determine this, lenders and mortgage underwriters conduct an extensive background check on you and your finances.
This includes reviewing your credit report, score, and history; your current employment and salary; your previous and current debts; and the property you wish to purchase.
How long does underwriting take?
As of March 2021, Ellie Mae (short for Electronic Mortgage Affiliates) reported the time between getting your application and providing the loan was about 52 days. FHA loans take about 55 days, while VA loans tend to take about 57 days.
Why is preapproval important to underwriters?
Let’s be practical: Real estate agents don’t want to show houses to people who can’t afford to buy them. Sellers only want to hear about “qualified buyers.” Your real estate agent will want you to get preapproved or prequalified for a mortgage.
This is where a lender initially reviews your financials, looks over some documentation and performs a credit check. There’s also a second level of preapproval called “verified approval,” which includes a credit check and a close review of your credit history. However, this process is only the first step and does not involve reviewing the property. This means you can still be denied by an underwriter after being preapproved.
- An underwriter denies a loan about 10% of the time.
- An application may be rejected because of high debt, irregular employment, or a low appraisal value.
- The entire underwriting process takes approximately 52 days to complete.
- Getting preapproved for a loan doesn’t guarantee your loan application will be accepted.
- If an underwriter rejects your mortgage application, learn why you were rejected and better your financial standing before reapplying.
View Article Sources
- 2020 Mortgage Market Activity and Trends — Consumer Financial Protection Bureau
- Home Loan Denial Rate — City of St. Louis
- 2021 Mortgage Industry Study — SuperMoney
- Best Mortgage Lenders | February 2022 — SuperMoney
- Home Purchase Mortgages: Reviews & Comparisons — SuperMoney
- How to Finance a House — SuperMoney
- The Ultimate Guide To Buying A New Home — SuperMoney
Bryce Sanders is president of Perceptive Business Solutions Inc. He provides HNW client acquisition training for the financial services industry. His book, “Captivating the Wealthy Investor” is available on Amazon. Bryce spent twenty years with a major financial services firm as a successful financial advisor. He has been published in 40+ metro market editions of American City Business Journals, Accountingweb, NAIFA’s Advisor Today, The Register, LifeHealthPro, Round the Table, the Financial Times site Financial Advisor IQ and Horsesmouth.com.