Functions of an Underwriter in the Mortgage Loan Process
An underwriter primarily has three job functions. First, the underwriter reviews the standard credit, income and asset documentation, as expected. Second, an underwriter fits the loan into the parameters of the specific loan program that has been requested (i.e. Fannie Mae, FHA, VA, etc.). Finally, an underwriter ensures all the required documentation makes it into the loan file.
The first part is easy. In most cases, a seasoned mortgage professional can tell whether a borrower will qualify for a loan in a matter of minutes. A quick review of the credit report, paystub, tax return, appraisal and title work tells 90% of the story. If that’s all there was to it, the world would have little use for underwriters.
The second part is where the underwriter earns their salary. In today’s mortgage market, the vast majority of loans are underwritten for Fannie Mae, Freddie Mac, FHA and VA. Each one of those entities has published their own respective guidelines, rules and requirements. The latest version of the Fannie Mae Selling Guide is 1,359 pages long. The FHA Handbook is similarly long, coming in at a formidable 979 pages. It is important to recognize those entities all have similar requirements, and an underwriter certainly hasn’t memorized every line of each publication. However, an underwriter must be familiar with significant portions of each, and must be aware of the differences between them. Depending on what type of loan has been applied for, an underwriter must know specifics of that particular loan program.
A few examples:
- A student loan has been deferred for the next 18 months. The VA will allow lenders to ignore whatever future payment will be required on that student loan. Freddie Mac requires lenders to qualify borrowers using 1% of the loan balance as a payment.
- A borrower is a salaried employee who happens to have a side business selling sports memorabilia. The business is used as a bit of a tax write-off to the tune of $5,000 per year. Fannie Mae gives lenders the freedom to ignore that $5,000 loss on the tax return. FHA will call for a deduction of that $5,000 from the borrower’s income.
- On a tight income, a borrower wants to purchase a new home. FHA will generally allow a
debt-to-income ratio into the mid-50s. Fannie Mae will probably cap the borrower somewhere
The third item is the dreaded documentation. Promise, underwriters aren’t mean-spirited; requesting documentation is necessary but not always enjoyable, and reviewing the documentation can get time consuming and monotonous. It would be ideal to underwrite a file with the minimum level of documentation, but sometimes, those aforementioned (Fannie Mae / Freddie Mac / FHA / VA) guidelines require lenders to go above and beyond what you’d think is reasonable.
A few examples:
- A borrower has a bank account. Their parent is still listed on it because the account was opened when they were 16 and never thought to remove the parent from the account once they became an adult. Well, FHA is going to require that the parent sign a letter stating that the borrower has complete control over that account, and that none of the money in it belongs to the parent. This is likely not something an underwriter would ask for but it may be required for FHA loans.
- Alimony is being received from an ex-spouse. The divorce decree has been provided which states the amount being paid. An underwriter will require six months of bank statements to prove the alimony has been collected for the most recent six months. Most underwriters would not ask for that if left to their own devices, but Fannie Mae requires it.
- An appraisal was done on the borrower’s home six months ago because there was interest in what the home was worth, and how much equity was available. An application is initiated for a loan to tap into some of that equity. That perfectly good appraisal from six months ago is provided, but an underwriter will inform the borrower a new appraisal must be ordered. This is because a government regulation requires that the appraisal is ordered through an independent appraisal management company.
A lot of these rules are well intentioned, and are designed to protect the consumer and limit fraud, but they also make the process more document-intensive.
The function of underwriters is key to getting a loan approved for funding. While the process can get involved and occasionally time consuming, borrowers need to understand that when a file is “stuck in underwriting” there is a clear reason why. Put simply, all loan program requirements must be met.
Written By: Sam Floyd, Underwriter at Royal United Mortgage LLC