What is mortgage underwriting and how does it work?

What is Mortgage Underwriting?

Mortgage underwriting is the process of evaluating a mortgage application to determine the risk involved in lending money to a borrower. It involves assessing the borrower’s financial situation, credit history, and the property they wish to purchase.

The goal of underwriting is to determine whether the borrower is a suitable candidate for a mortgage and to determine the terms and conditions of the loan, such as the interest rate and repayment period.

Why is Mortgage Underwriting Important?

Mortgage underwriting is an essential step in the mortgage application process for both the borrower and the lender. For the borrower, it ensures that they can afford the mortgage and that they are not taking on more debt than they can handle.

For the lender, underwriting helps to mitigate the risk of lending money to a borrower who may not be able to repay the loan. It also ensures that the lender is complying with regulations and responsible lending practices.

Human or AI?

Most lenders will use software alongside real underwriters to assess mortgage applications.

The key differences between automatic and manual underwriting lie in their approach, with automatic underwriting relying on algorithms and set criteria, while manual underwriting is based on human judgement and assessment.

Automated underwriting is generally faster than manual underwriting but cannot handle complex or non-standard financial situations as effectively as manual underwriting, which offers more flexibility.

The choice between the two depends on the specifics of the mortgage application, with automatic underwriting being efficient and quick for straightforward applications, and manual underwriting offering the necessary flexibility for more complex cases.

The advantages of automated underwriting include its speed, as decisions can be made quickly, often within minutes or hours. It also ensures consistency in decision-making, reducing the chance of human error or bias, and allows lenders to process a large number of applications efficiently.

It is very common for a broker to discuss a potential mortgage with a (human) underwriter before a formal application is made.

This is helpful with more complex mortgage situations, allowing the broker to explain the situation, before any costs are incurred.

How Does Mortgage Underwriting Work?

The process will vary slightly depending on the lender, but it generally follows a similar structure. Here’s a breakdown of the steps involved in mortgage underwriting:

Step 1: Initial Assessment

The first step in the underwriting process is an initial assessment of the borrower’s mortgage application. This involves reviewing the borrower’s credit score, income, and employment history to determine their eligibility for a mortgage.

If the initial assessment is positive, the application will move on to the next stage. If not, the lender may reject the application or request additional information.

Step 2: Affordability Assessment

The next step is an affordability assessment. This involves looking at the borrower’s income and expenses to determine how much they can afford to borrow.

The lender will consider the borrower’s income, including any bonuses or commission, as well as their regular expenses such as bills, loans, and living costs. They will also take into account any existing debts the borrower may have, such as credit card balances or car loans.

The lender will use this information to calculate the borrower’s debt-to-income ratio, which is a key factor in determining their mortgage affordability.

Step 3: Property Valuation

Before approving a mortgage, the lender will need to assess the value of the property the borrower wishes to purchase. This is to ensure that the property is worth the amount the borrower is requesting to borrow.

The lender will typically arrange for a basic valuation to be carried out on the property.

If the property is deemed to be worth the amount the borrower is requesting, the application will move on to the next stage. If not, the lender may reduce the amount they are willing to lend or reject the application altogether.

Step 4: Final Assessment

The last stage involves a final assessment of the borrower’s application. This is where the lender will review all the information gathered during the previous stages and make a decision on whether to approve the mortgage.

The lender will consider the borrower’s credit history, income, expenses, and the property valuation to determine the level of risk involved in lending to the borrower. They will also take into account any other factors that may affect the borrower’s ability to repay the loan, such as their age or employment status.

If the lender is satisfied with the borrower’s application, they will issue a mortgage offer. If not, they may reject the application or request additional information from the borrower.

How long does underwriting take?

The duration of the underwriting process can vary depending on various factors, such as the complexity of the application and the efficiency of the lender.

On average, it can take anywhere from a few days to a few weeks.

You can do three things to improve the timescale:

1. Ask your broker to choose a lender who is not experiencing any delays in reviewing new applications
2. Get all of your paperwork and information together before you apply
3. Respond quickly to any requests for extra details

What Happens After Underwriting?

Once the underwriting process is complete, and the lender has issued a mortgage offer, the borrower can proceed with the purchase of the property. However, there are a few things to keep in mind after mortgage underwriting:

Survey Results

If the survey or valuation on the property reveals any issues, the lender may request that these are addressed before they release the funds. This could include repairs or renovations that need to be carried out before the property is deemed suitable for a mortgage.

Changes in Circumstances

If the borrower’s circumstances change between the time of the mortgage offer and the completion of the purchase, the lender may reassess the application. This could include a change in employment status, income, or credit score.

It’s quite common for a lender to conduct another credit check just before they release the mortgage money.

Mortgage Offer Expiry

Most mortgage offers are valid for a limited time, typically between three and six months. If the borrower does not complete the purchase within this time frame, they may need to reapply for a mortgage.

How Can I Improve My Chances of Mortgage Underwriting Success?

The key to a successful mortgage application is to ensure that you are well-prepared and have all the necessary information and documentation ready.

Here are a few tips to help you improve your chances of success:

Check Your Credit Score

Before applying for a mortgage, it’s a good idea to check your credit score. This will give you an idea of how likely you are to be approved for a mortgage and whether you need to take any steps to improve your credit score before applying. Your broker can help with this.

Gather All Necessary Documents

To speed up the underwriting process, make sure you have all the necessary documents ready when you apply for a mortgage. This includes proof of income, bank statements, and any other documentation the lender may require.

Be Honest and Accurate

When completing your mortgage application, be honest and accurate with the information you provide. Any discrepancies, omissions or false information could result in your application being rejected.

Will a Decision in Principle help?

A Decision in Principle (DIP), also known as an Agreement in Principle or Mortgage in Principle, is a document provided by a lender that indicates how much they may be willing to lend you based on an initial assessment of your financial situation.

While a DIP can be helpful in the mortgage application process, it is important to note that it is not a guarantee of a mortgage offer.

Obtaining a DIP can be beneficial for several reasons.

Firstly, it gives you an indication of how much you may be able to borrow, which can help you set a realistic budget when searching for a property. It can also give you confidence when making an offer on a property, as sellers may view your offer more favourably if you have a DIP in place.

Additionally, a DIP can help speed up the mortgage application process. Since the lender has already conducted an initial assessment of your financial situation, they may be able to process your application more quickly once you have found a property.

However, a DIP is not a guarantee of a mortgage offer.

The lender will still need to conduct a full assessment of your application, including a more detailed review of your financial situation and the property you wish to purchase. They may also request additional documentation and information before making a final decision.

Why would an underwriter decline your application?

There are many reasons why an underwriter may decline a mortgage application.

One common reason is a low credit score or adverse credit, indicating a history of missed payments or high levels of debt.

Another reason could be insufficient income or unstable employment, making it difficult for the borrower to afford the mortgage payments.

Additionally, if the property valuation comes in lower than expected, the lender may decline the application or reduce the loan amount. A rejection can also be triggered if the property is deemed unsuitable by the lender. Often this is due to non-standard construction, such as PRC concrete, steel framed or ex-local authority.

How can a mortgage broker help

A mortgage broker can be quite helpful during the underwriting stage of a mortgage application.

Here are several ways they can assist:

• Gathering and Organising Documentation: Mortgage brokers help you collect and organise the necessary documentation required for the mortgage application. This includes proof of income, bank statements, credit history, and other relevant financial details. By ensuring that all documents are complete and correctly presented, brokers can help speed up the process.
• Liaising with Lenders: Mortgage brokers have established relationships with various lenders. They can communicate effectively with underwriters on your behalf, ensuring that any queries or concerns are addressed promptly. This can be particularly beneficial in cases where applications are complex or non-standard.
• Expertise in Lender Criteria: Brokers have knowledge of the specific criteria and requirements of different lenders. They can advise you on which lenders are most likely to approve your mortgage based on your individual circumstances, reducing the likelihood of application rejection.
• Advice on Complex Situations: If you have a complex financial situation (such as being self-employed, having a poor credit history, or requiring a large mortgage), a broker can provide tailored advice. They understand how different factors can affect the underwriting process and can guide you accordingly.
• Managing Expectations: Brokers can help set realistic expectations about the timeline and potential outcomes of the underwriting process. They can keep you informed about the progress of your application and any potential delays.
• Negotiating Terms: In some cases, brokers can negotiate the terms of your mortgage with lenders.
• Problem Solving: If issues arise during the underwriting process, brokers can help resolve them. This may involve providing additional information to the lender or re-assessing your application to find a more suitable mortgage product.