The Mortgage Underwriting Process

July 17, 2020
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Applying for a mortgage for the first time is a steep learning curve. You will be introduced to many new concepts and terms that may make the whole process feel a lot more daunting. The mortgage underwriting process is one such example of a complex and opaque field. 

In this guide, we will break down the underwriting process for the typical mortgage application. We’ll outline what the process is, who is responsible for it, the steps in the process and the things you can do to increase your chances of being accepted.

What is underwriting?

Every financial application will undergo a process known as underwriting. This process calculates the level of risk for the lender so that they can determine how much interest should be charged on the loan. It also helps the lender decide if they are happy to take on the risk. 

If the risk is considered to be too high, your application may be rejected. If the risk is high but still acceptable, you may be offered a loan at a high rate of interest. And if the risk is low and you are very likely to be able to pay the loan back in full, you will be offered a low-interest rate.

What is an underwriter and what role do they play in the mortgage process?

The underwriting process is carried out by a mortgage underwriter. These are highly trained individuals who work for mortgage companies. They are tasked with assessing the risk attached to each lending application, whether it is for a mortgage or a personal loan.

The mortgage process needs underwriters to help determine the interest rate you will pay on your mortgage. The mortgage underwriter will also play a role in determining the affordability of a loan and deciding how much you can borrow.

Why do banks use underwriters?

Banks use underwriters and the underwriting process to manage their risk. Every financial decision comes with a certain level of risk. In the mortgage industry, lenders are trying to manage the risk that a borrower might be unable to keep up with the payments. 

If the lender is forced to repossess the property, there is always the chance that the property will sell for less than it was originally purchased for. This would leave the lender out of pocket, as they would not be able to get their full investment back.

When does the underwriting process happen?

When your mortgage application reaches the underwriting stage, there is still a chance it could be rejected. The underwriting stage happens after you have gone through the soft credit check and the scorecard steps. 

At this stage, the lender brings together all of the information they have about you and the property to determine if lending you the money to buy the property is worth the risk.

After the underwriting process is completed, you will be given a final decision on your mortgage application. This can be an incredibly stressful time for applicants, so it helps to understand the steps in the process so you can be prepared.

What are the steps in the underwriting process?

Understanding the steps in the underwriting process can help you to ensure your application succeeds. When you understand what the lender is looking for in advance, it can be easier to pre-empt any potential problems.

Remember that the underwriting process is not just about assessing risk to the lender, it’s also about making sure that the mortgage is affordable and responsible. The validity of your documents will be scrutinised and any information you have provided about your income, expenses and expenditure will be put under the spotlight.

Most mortgage providers in the UK will follow the same underwriting process which can be broken down into the following sections:

  • Policy rules. Every lender will have their old policy rules which your application must satisfy. This can include things like your age, your credit history, LTV and your legal status. Your mortgage broker or advisor should help you to understand if you meet all of these requirements before you submit your application.
  • Credit reporting. The mortgage underwriting will look at your credit history to determine if you are likely to be able to repay your mortgage. They will use statistical models to compare your application to other applications in the past.
  • Fraud checks. These checks ensure that you aren’t laundering money or lying about your identity. They will also look at the source of your deposit, so you may have to provide more details. If you were given your deposit as a gift, for example, the underwriter may need more details to satisfy this section of the application.
  • Affordability. Every lender will use a different calculation for affordability. In general, this calculation will take into consideration the information that is gathered during the underwriting process. 

For example, the underwriter will look at your current financial situation, ongoing debts, average expenditure and potential for increases to your income. They will then determine how much they are willing to lend you based on this information. 

Many lenders will calculate affordability based on a multiple of your annual salary, typically 4-5x your annual income. For if you’re earning £35,000 per year, you might be offered between £140,000 to £175,000.

  • Property valuation. The final part of the puzzle is the property valuation. Lenders will carry out their valuation to make sure you aren’t paying too much. They will also look at things like the age and condition of the property and the construction materials to make sure the property won’t fall in value unnecessarily.

How long does this process take?

There isn’t a fixed time for the underwriting process. It will vary depending on many factors including:

  • The details of your application. If they require further information, this can slow things down.
  • The experience level of the mortgage underwriter. A new underwriter might be slower to work through the checks.
  • The number of applications. During busy times of the year, such as over Christmas and New Year, office closures might lead to delays in your application. Spring is also a busy time for applications so you may have to wait longer.

What might cause an application to be rejected?

There are a few different reasons that a mortgage underwriter will reject your application. These can typically be put into two categories. Either your situation changed while the application process was taking place, or the underwriter discovered something in your application which makes you high risk.

If you have been made redundant while you are waiting for a decision, this could impact your ability to repay your mortgage. In this situation, it might be wise to wait until your finances improve before you move forward with another application.

If your mortgage is rejected because the underwriter has unearthed something which makes you a high-risk borrower, this will need to be addressed before you submit another application. The underwriter may discover a discrepancy between your stated earnings and what is coming into your account every month. Or they may have unearthed an undeclared debt which changes the risk level for the lender. 

In some cases, it is items on your bank statement which can cause an underwriter to reject your application. Gambling websites appearing on your bank statement is a common reason for a mortgage application to be rejected. In some cases, applications have even been rejected for having foul language in payment references. 

While it might seem funny to send money owed to a friend with a swear word in the payment reference, this could impact your ability to secure a mortgage. 

How can I increase my chances of being accepted?

Working with a broker can help you to avoid some of the most common reasons that applications get rejected. A broker will be able to assess your finances and your current situation and determine the likelihood that your application will be accepted. If there are any issues with your application, these can be cleaned up before it gets to the underwriting stage.

A rejected application can be a huge blow to your confidence and it might leave you wondering if you will ever be able to get a mortgage. If your application is rejected, you should find out why the mortgage was declined. Lenders will usually tell you the reason, but you may need to chase this. In some cases, you simply need to increase your deposit or reduce your other debts to make your application lower risk. 

If a mortgage application is rejected at the soft check phase, this is unlikely to show up on your credit report. But an application rejected by an underwriter will show up on your credit report. If this happens, it’s a good idea to wait a while before submitting another application.

The best way to increase your chances of being accepted while also making the application process less stressful is to work with a broker. This is particularly true for those with unique financial situations such as business owners and the self-employed.

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