Underwriting is vital to the business of lending as it is a thorough check and assessment of a prospective borrower’s ability to pay back the requested loan and serve interest payments on it. The lender does an extensive check on the credit health, behaviour of the borrower, and on the property that is being mortgaged against the loan to make a judgement on the risk of default.
The decision to approve a loan application or not is taken based on this assessment. The check is crucial not just to preserve the asset quality of the business but also because it determines the interest charged to a particular borrower; the higher the risk of lending, the higher the interest rate charged and vice versa.
Mortgage underwriting involves collecting and interpreting a large volume of data and requires skills and knowledge specific to the process. This is why most lending institutions choose to outsource mortgage underwriting services to mortgage underwriting companies so that they can focus on their core business.
Since a lot of crucial decisions are based on the underwriting assessment, it is vital to ensure that the process is error-free and is executed systematically, adhering to industry accepted well-defined standards and regulations. Oversight or missing out on any step could lead to an incorrect inference causing serious implications. So let’s go through the journey of mortgage underwriting together, but before that, here are the four factors that need to be assessed by the underwriter.
Factors that Underwriters should be Assessing
- Credit: The applicants’ credit history provides insight into their credit discipline and could be used to ascertain whether there was a potential threat of wilful default. Parameters such as the credit score or a detailed credit report help in determining if the applicant has undertaken other loans and if so, are they making repayments on time. Applicants’ outstanding debt to income ratio would show exactly how leveraged they already are and would indicate their capacity to take up additional debt.
- Collateral: Simply put, if there is a default, the lender would be left with the collateral as an asset to pare its losses. Therefore, it is essential to investigate the value of the collateral, the loan to value ratio, the deed or ownership papers, in case it is an immovable asset then the jurisdiction it falls under would be crucial.
- Stability of Income: This criterion is used to determine whether the applicant is capable of servicing regular instalments. An employment history would indicate whether the person tends to give up jobs on a whim and remain unemployed for extended periods. Investigation of tax returns and bank statements would give a fuller picture of any other sources of income and could be telling of the compliance and discipline within the person. Bank statements would also help understand the spending habits and disposable income of the applicant. A higher ratio of the down payment on the property to the credit sought for it is also a favourable indication of the applicant’s ability.
- Wealth: Adequate financial reserves also reflect financial stability. It supplements and, depending on the value of the loan, even substitutes a stable employment history.
These factors together portray the financial story of a prospective borrower. The underwriter finds a balance between the weightage of these factors and then decides whether or not to approve a loan.
Crucial Steps in Processing a Mortgage Underwriting
Mortgage underwriting services are a blend of automation and human intervention to study and assess large volumes of data. Automation ensures error-resistance while human intervention allows for exceptional situations to be evaluated separately.
- Establish Minimum Requirements and Standards for Approval
First, minimum requirements for the documentation process and guidelines for information analysis and risk assessment need to be established. This would lay the foundation for an effective underwriting and loan approval process. The mortgage underwriting company you have outsourced mortgage underwriting to would already have ascribed to global standards such as Fannie Mae and Freddie Mac guidelines, or an equivalent. However, every bank or lending organisation has its risk appetite, and some credit standards are idiosyncratic to it. The underwriting guidelines established should be compliant with global standards and should compliment the lender’s larger loan policy and strategic growth plan.
- Pre Qualification
This is a fairly quick process where the loan seeker shares basic information on income and a credit score to which the lender responds with an estimate of monthly instalments and the interest rate that it could offer. Loan seekers can now design a budget for their asset purchase and work on arranging the down payment.
Some lenders offer this service to be sought online and respond as soon as possible, even within an hour. At this stage, the lender could also engage with the loan seeker to discuss options suitable for the latter, given their down payment amount and mortgage expectation.
- Verification for Pre-Approval Letter
This is where the actual paperwork begins. The loan seeker submits an elaborate application, attaching copies of pay stubs for income earned in the last thirty days, a credit check, bank account numbers or two recent bank statements, W-2 statements and personal and business tax returns for the past two years, and the down payment amount and the mortgage requirement.
A pre-approval letter holds far more weightage for the property seller as it is a proof of verification by the lender of the holder’s financial ability to secure the property. This distinguishes the holder from the rest of the prospective buyers as someone with a sincere interest in the property.
- Appraisal of the Property
Once the prospective borrower has finalised the property to be bought with the loan, the lender would set out to inspect the property. As an investor, the lender would want to check whether the property is worth the amount the loan seeker has agreed to pay for it. In the case of a house, a judgement will be made dependent on the physical condition of the house.
The lender should also conduct an enquiry into what purpose the property will be used for; commercial or residential purposes. It would be in the lender’s interest to ensure that the property is not used for unlawful purposes because, in case of a default by the borrower, the ownership would lie with the lender. The lender should try to ensure that such undue factors do not eat into the value of the property.
- Check for Other Claims and Title Insurance
The lending institution would want to ensure that the property has no legal claims on it. This would protect its claim to the property in case the borrower is unable to repay the debt.
As a part of mortgage underwriting support services, a title company is hired to thoroughly research the history of the property, for prior mortgages, liens, outstanding tax liabilities, easement rights, zonal restrictions on how the property can be used or any other legal restrictions.
The title insurer provides insurance policies to protect both the prospective property buyer and the lending institution.
- The Decision
The lender has to now decide whether they want to approve the loan, reject it, suspend it, or approve it with a few conditions or contingencies.
An approved loan shall be cleared for closing.
The grounds for rejection would be the inability of the application to meet the set criteria. This decision is not based on a poor rating in a single criterion but a combination of all criteria; weaknesses in most parameters with no extraordinary strength in a certain parameter to compensate.
An application is suspended when the lender cannot verify some details due to the absence of documents; the loan seeker can reactivate the process once these submissions are made.
On some occasions, where the application has been completed with required documentation, and yet the lender may want a few additional documents, the loan may be approved on the conditions that such submissions will be made within a given time frame.
- Closing Date
On the ‘Closing Date,’ the lender will transfer the loan to the seller of the property on behalf of the borrower. However, a few days before the day, the lender must send the loan closing disclosures to the borrower for review. On the final day, the transfer of ownership of the property is executed, and the borrower of the loan clears all charges to the lender.
A mortgage contract underwriting services provider carries out this detailed evaluation of several loan applications on behalf of the lender. Let’s understand why lenders choose outsourced underwriting of loans instead of performing this salient task themselves:
Why Are Lenders Outsourcing Mortgage Underwriting?
Outsourcing mortgage underwriting is a popular trend which has taken deeper roots in the corona times. Here are some of the reasons for its popularity”
Third-party service providers house experts have years of experience specifically in the field of mortgage underwriting. The process of underwriting requires knowledge of compliance, constantly changing regulations, and best practices of the industry. These experts understand how some loan seekers may leverage loopholes in guidelines to conceal their financial details.
Rapid Turnaround Time
A large, dedicated team of personnel supported by automated processes work around the clock, quite literally. Having established operations in different countries and time zones, mortgage underwriting companies have displayed a rapid turnaround time. Lenders could get minimal underwriting done in the same time frame due to smaller teams, few specialists and most personnel also attending to other facets of the business. Outsourcing mortgage underwriting frees up lenders’ time to focus on their core competencies and enables them to service greater volumes. Faster underwriting has also lenders with customer retention.
Saving Cost on Payroll and Technology
Setting up a separate unit in lending institutions for mortgage underwriting services and maintaining staff on the payroll is far more expensive than paying a fee for outsourced underwriting. Given that teams drawn up for underwriting at lending institutions were small and could manage far less work than third-party companies, a large spend on automation to assist would fail to generate economies of scale.
Third-party mortgage underwriting companies also assist lenders’ aspirations of growing business volumes as they are easily able to increase the resources dedicated to your account. This helps especially when there are seasonal disruptions in business volumes. At the time of a seasonal spike, mortgage lenders need not overwork their in-house team of underwriters or hire additional staff.
Selecting an Appropriate Mortgage Underwriting Services Provider
Success in mortgage businesses depends a lot on who you partner with. And this, in other words, means making the right pick as your partner. Some such parameters include:
Access to some of the most experienced and knowledgeable professionals in the field is one of the primary advantages of involving a specialised team to take on the task of underwriting mortgage loans. Despite automation, there are several areas where human judgement is vital in assessing an applicant.
Given the complexity and the stakes involved in the process of mortgage underwriting, the choice of a third-party needs to be thought over carefully. Quality should take precedence over cost, and one should select the team with most experienced professionals and superior automation infrastructure.
Compliance and Certification
The underwriting service provider must comply with industry regulations, and protocols and its employees should have a thorough end-to-end understanding of all appraisal guidelines. Appraisal reports prepared by employees must undergo another level of checks for compliance and accuracy before they are passed onto the next stage.
To avail the services of third-party underwriting companies, lenders have to provide them access to their confidential and sensitive database. If this database is leaked in the public domain or falls into the hands of wrong people, it would demolish the lender’s reputation and business. There is also the threat of cybercrime. Therefore, It is imperative that the company that you choose to outsource mortgage underwriting services to, prioritises data security and has adequate training and certification for the same. It is also important the employees handling sensitive data are trained to recognise and combat cybercrime threats. Experienced team of specialists.
Automation prevents errors from creeping into data analysis and almost halves the time taken to complete the underwriting process. The quantum of investment made by the company towards integrating automation into processes should be an important consideration.
Technology should also be aligned towards data control and detecting lapses in compliance with regulatory standards.
Can the Lender Cancel a Loan Even after Issuing a Conditional Approval?
The lender reserves the right to cancel the conditional approval of a loan before the ‘Closing Date’ on these pretexts:
- Discrepancies found in conditional documentation provided by the loan seeker
- The mortgaged property is damaged in an unexpected natural disaster
- Creditworthiness of the loan seeker deteriorates as contingent liabilities kick in
- The loan seeker’s credit rating is downgraded
Who We Are and Why Trust Us Our Services
Expert Mortgage Assistance (EMA) is a mortgage loan servicing solutions provider that caters to the prime US commercial and residential mortgage markets for over a decade. Over the years, we have assisted a range of mortgage lenders and credit unions in turning out quality loans for easy saleability in the secondary market. Underwriting services is one of our areas of speciality. Our proprietary automated platform, MSuite, has helped us provide our clients with the technological edge needed to stay ahead in the market.