Some home buyers sail through the mortgage underwriting and closing process with no issues whatsoever. Other borrowers encounter a few snags along the way, which can delay the closing.
The truth is, there are many issues or problems that can arise during the mortgage underwriting process. But there are also ways to avoid many of them. The key is to understand how the process the works, and what the underwriter is trying to accomplish.
Below, we’ve explained some of the most common underwriting problems that could delay (or even derail) your closing process — and how you might avoid them.
Mortgage Underwriting Defined
Mortgage underwriting is a process through which lenders (A) measure the risk associated with a certain borrower, and (B) ensure that the loan complies with minimum requirements. The lender will verify that the loan meets the guidelines imposed by any secondary agency, such as the FHA, VA or Freddie Mac.
The underwriter will also make sure that the borrower has the ability to repay the loan, and that the property being purchased is sufficient collateral for the loan. This can be accomplished through income verification, bank account evaluation, and home appraisals.
Underwriting usually takes place after the home has been appraised, and it always happens before the final closing process.
9 Underwriting Issues That Could Delay Closing
When it comes to mortgage lending, problems can arise at several stages of the process. For instance, some borrowers might encounter issues when first applying for a loan, or closer to the closing date.
But most problems occur during the mortgage underwriting process. And that’s only logical, when you consider that it’s basically an in-depth screening process. Below, we will examine some of the most common underwriting problems that could delay the closing.
Note: The following items are listed alphabetically, not by importance or frequency.
1. Applicant does not have sufficient income.
Borrowers need to have sufficient income to qualify for the size of loan they seek. In most cases, the broker and/or loan officer will check this on the front end. They do this by looking at pay stubs and tax records, and sometimes banks statements as well. The mortgage underwriter will also review the borrower’s income.
Lenders verify income to make sure borrowers can repay their mortgage debt, on top of the other debts they currently have. (See “debt-to-income” below for more on this.)
Insufficient income can delay the closing and, in some cases, lead to rejection. The best way to avoid this is to shop for a home that falls within your price range. Getting pre-approved for a loan prior to house hunting can help you narrow your search to a specific price range. This in turn can reduce the chance of mortgage underwriting problems later on.
2. Applicant does not have required cash reserves.
Some lenders require borrowers to have additional money in the bank, above and beyond the down payment and closing costs. These funds, known as “cash reserves,” are intended to cover the first few mortgage payments.
They’re also referred to as “mortgage reserves” or “liquid financial reserves.”
This is another common underwriting problem. If a lender requires such reserves, but the borrower doesn’t have enough money in the bank to meet that requirement, it could lead to closing delays or outright rejection.
But it’s important to note that not all lenders have cash-reserve requirements. Some lenders only require them for larger “jumbo” loans, or for for higher-risk borrowers with credit issues in the past. It varies. So it’s something you want to ask about up front, before applying for a loan.
3. The borrower’s credit score is too low.
The underwriter will likely check your credit report history to see how you have borrowed money in the past. If the underwriter finds derogatory items such as late payments (covered below), he/she might request a letter of explanation from the borrower.
When there is a pattern of such issues, it could even derail the loan. These problems are often uncovered during the underwriting stage.
Having a history of late payments on past credit accounts (credit cards, student loans, mortgages, etc.) could harm your chances of getting approved for a loan. It lowers your credit score and makes you a bigger risk, from the lender’s perspective.
4. The debt-to-income (DTI) ratio is too high.
Having too much debt is another common problem revealed during the mortgage underwriting process. In some cases, this kind of issue will get past the broker or loan officer, only to surface when the underwriter reviews the application file.
Mortgage lenders use the debt-to-income ratio, or DTI, to determine a borrower’s overall financial picture. This is a comparison between the amount of money you earn, and the amount you spend on your various debts.
These days, many lenders (and their underwriters) set the maximum total DTI ratio somewhere between 40% and 45%. But exceptions can be made for otherwise well-qualified borrowers.
If the underwriter determines that you’ll end up with too much debt, including the mortgage payments, he or she might disapprove of the loan.
5. Employment history falls short of lender guidelines.
Different lenders have different requirements for employment. The rule of thumb is that borrowers must have at least two consecutive years of employment, in order to qualify for a mortgage.
But this is not a hard-and-fast rule. There are exceptions.
If the underwriter determines that the borrower falls short of the lender’s employment requirements, it could lead to problems. In the best-case scenario, the underwriter will simply require a letter of explanation. In the worst-case scenario, the loan will be denied during the underwriting stage.
6. Borrower’s funds are not “sourced and seasoned.”
Another common problem occurs when the money set aside for the down payment cannot be properly “sourced.” This means the underwriter cannot determine where the money came from.
The lender might also require the funds to be “seasoned,” which means they have to be in the bank for a certain length of time. Both of these requirements could potentially cause issues during the underwriting stage. This is another item you’ll want to ask about up front, when you first start talking to a lender.
7. The home appraised below the purchase price.
Before they can approve a loan, mortgage lenders need to ensure that the home is worth the amount the buyer has agreed to pay. So they’ll send a licensed appraiser to determine the current market value of the property.
A low appraisal can create problems during the underwriting process. This is when the home appraises for less than the purchase price. In cases of a low appraisal, the seller can lower the sale price or the buyer can pay the difference out of pocket. If the two parties cannot find common ground, the mortgage may be denied in underwriting.
8. The homeowner has insufficient equity for refinancing.
This problem applies to homeowners who are trying to refinance an existing mortgage. According to Mike Lyon, vice president of operations at Quicken Loans: “the number one reason for suspense, without question, is collateral. It dwarfs every other reason. Simply put, many clients think that their home is worth more than others in their neighborhood.”
9. The borrower cannot provide the required documents.
Document-related problems typically do not derail mortgages, in and of themselves. But they can delay the escrow closing process. So it’s important that you provide all of the requested documents in a timely fashion, and in their entirety.
Bank statements are a good example. Lenders will usually request the last two months worth of bank statements. They do this to ensure you have stable income and sufficient funds for closing, among other reasons. If you’re unable to provide bank statements for some reason, it could cause issues and delays during underwriting.
Note: These are not the only things that can go wrong during the mortgage underwriting process. They are just some of the most common problems that plague borrowers who are seeking a home loan.
How to Keep the Process on Track
Now for the big question. How can you, as a borrower, avoid the underwriting delays and issues listed above? Here are three things that could help you keep the mortgage process on tack:
- Research: Spend some time researching the minimum requirements for the type of home loan you plan to use. This could help you avoid unpleasant surprises down the road. FHA. VA. Conventional. Jumbo. All of the different mortgage programs have certain requirements. Researching them in advance will make you better informed — and better prepared. (Just know that exceptions can be made for many of those requirements. So don’t count yourself out if you fall short of them. Speak to a lender anyway.)
- Preparation: There are several things you could do right now to improve your chances of mortgage approval later on. For instance, you could start saving money to cover your down payment and closing costs. As we’ve discussed, having sufficient funds in the bank can help you avoid mortgage underwriting problems. You could also review your credit reports for accuracy, and check your credit score to see if it needs improving. The sooner you start these things, the better.
- Communication: You should have a primary point of contact when applying for a mortgage loan, and through the rest of the process as well. This is usually a broker or loan officer. Keeping in close contact with this person could help you avoid underwriting delays — or resolve them when they do arise. Check in with your point of contact throughout the process, to make sure they have everything they need from you. If the underwriter or loan officer requests additional information, try to provide it in a timely manner.
Disclaimer: This article covers some of the most common issues that can affect home buyers during the mortgage underwriting process. But it doesn’t cover every possible scenario. The lending process can vary from one borrower to the next, so portions of this article might not apply to you.