Mortgage Underwriting Conditions
Mortgage underwriting conditions (or sometimes commonly referred to as just “conditions”) come in variety of forms. In many cases, the first underwriter you come up against isn’t even a human being. It’s most likely some kind of automated underwriting software, or AUS. It scans and analyzes your 1003 application and submission documents and delivers its “recommendation”. Then a live person takes over and issue their conditions.
- Your first set of conditions usually deals with the paperwork that proves your income and assets, financial stability
- You might also have to provide any secondary paperwork, like a divorce decree or business license, or explain a credit problem
- Other hurdles can include other prior-to-funding or prior-to-documentation requirements
Your final conditions might include things like bringing in your down payment, paying off an outstanding judgment or closing certain accounts. Conditions can include just about anything that a lender needs to be confident that you can repay your mortgage as agreed.
Common underwriting conditions
It’s true, the mortgage approval process can happen much faster than in the past. Lenders now have direct channels which allow them to instantly get banking and tax information. There’s less searching for odd paperwork or missing pages with such systems. With our current data storage options and access, borrowers can be initially approved at the speed of electronics.
But for lenders, the story is pretty different. Lenders need to verify that the borrower has the ability to repay the loan. They must be absolutely certain that every claim made by the borrower on the loan application is fully correct. Loan originators must be sure the borrower and the property meet standards established by mortgage investors and insurers.
Mortgage underwriters (the humans who check all the paperwork) want to see the loan go through. Despite what the hoops they may make you jump through indicate.
Lenders don’t make any money when loan applications are declined. Yet, at the same time, underwriters need to protect the lender’s interest. An improperly originated loan could lead to really big fines, possible loan buy-backs, and legal claims. Underwriters are there to make sure the loan package is correct and complete to its fullest extent.
So keep in mind, even when the computer says “yes,” borrowers will still face hurdles. The underwriter always has questions and concerns. It’s best to think of all loan approvals as conditional, at least until you see funding.
The contract between the buyer and seller is filled with requirements for both parties. The term “requirements” is… a nice way of saying land mines. Does the survey show an encroachment? That’s a problem. The entire property is security for the loan, so a boundary dispute is a red flag for underwriters. Does the appraised value support the sales price? Lenders base financing on either the appraised value or the sale price, whichever is lower. A low appraisal may mean that a buyer needs additional money from their own pocket for closing. It could also mean the deal may not go through.
Lenders will require flood insurance if your home is in a designated flood zone. Floodplain maps are constantly being re-drawn, so it may be that a property which did not require such coverage now does. A sudden sharp cost increase may mean that a buyer no longer qualifies for financing.
Gifts for a down payment or closing costs are okay with almost all loan programs. Lenders however, can be pretty choosy about who provides the gifts, and they want to make sure that the money is really a gift, not a loan. They also want statements to show that the gifter actually had the money in the first place, and didn’t take out a loan themselves to give you the gift. Underwriters will require a letter from the donor saying repayment and interest are not required. They want to be certain that the money doesn’t come from anyone who directly benefits from the sale. So the seller can’t “gift” you the down payment.
Automated systems may generate needs for additional documentation.
How do you explain that job gap? Why is your work history less than two years? Your bank records show a huge deposit last year. Where did you get the money? You will probably have to show a letter of explanation for issues like this that may arise. If you have investment properties, lenders will want copies of lease agreements. They’ll also want tax records. If the property has no rental history, the lender requires a licensed appraiser to complete a rental schedule showing the property’s fair market rent.
It used to be that a mortgage approval was pretty much a final decision. That’s no longer the case. With artificial intelligence and big data, lenders now have the ability to constantly update files with new credit information. Such new technology can be a trap for unwary borrowers.
Don’t apply for new credit or even use existing credit lines. If a loan program says you can only spend 43 percent of your monthly income on recurring debts, a larger account balance can push you over the limit. In the era of tight credit standards, new spending can move a mortgage application from “approved” to “declined.”
Underwriting conditions: one more reason to get pre-approved
There are several steps borrowers can take to prevent post-approval surprises.
First, to the extent possible, spend only cash in the period between signing a sale agreement and closing your loan. Do not add to credit card balances and do not open new accounts.
Second, check your credit report at least two months before making a mortgage application. Do you see incorrect items that might lower your credit score? Any items so old they should not be reported? Contact the credit reporting agency if you find problems.
Third, get mortgage pre-approval before home shopping. Have a loan officer submit a full application package for underwriting, including a credit report. See if any paperwork is missing or if any questions come up. A pre-approved buyer is almost as attractive to sellers as a cash buyer, and you’ll know how much you can safely spend.
Lastly, start a folder to hold all of your paperwork, such things as tax returns, sale agreements, leases, and payroll stubs. As new material comes in, add it to the folder, so that everything is up-to-date in case the underwriter needs more documentation.
Mortgage underwriting conditions (or sometimes commonly referred to as just “conditions”) come in variety of forms.
*This article does not represent legal interpretation or advice. This is not a commitment to make a loan. Loans are subject to borrower qualifications, including income, property evaluation, sufficient equity in the home to meet LTV requirements, and final credit approval. Approvals are subject to underwriting guidelines, interest rates, and program guidelines, and are subject to change without notice based on applicant’s eligibility and market conditions. Refinancing an existing loan may result in total finance charges being higher over life of loan. Reduction in payments may reflect longer loan term. Terms of the loan may be subject to payment of points and fees by the applicant. Seattle Mortgage Brokers, LLC NMLS: LO# 305371 MB# 761615*