You picked out the house you want, submitted the mortgage application and provided supporting documents. Now your fate rests in the hands of the underwriter. It is this person who will decide whether or not your loan is approved or denied. Underwriters consider various factors when making their final decisions, and knowing which ones will cause them to turn down a loan can help you improve your approval chances.
An underwriter might turn down a loan if you have a low credit score, don't meet income requirements, lack cash reserves or have a high loan-to-value ratio for the property.
The Underwriter's Role
Once your loan application for a home purchase has been received and processed, it moves on to the desk of the underwriter. The underwriter is responsible for evaluating whether or not you are an acceptable financial risk for the lender to take. Income, credit, cash reserves and the property itself are four of the most important criteria that an underwriter will examine to determine whether or not he should approve the loan. If everything checks out, the loan will be conditionally approved.
Your credit score and history play an important role in the underwriting process. According to Lending Tree, a minimum credit score of 620 is required for approval of a conventional mortgage loan, although lower scores can qualify for government mortgage programs. Even if you have a high credit score, blemishes in your history such as a past short sale can hurt your chances. If your credit score or history is not impeccable, it is best to prepare an explanation of any issues, correct errors, and cure and delinquencies ahead of time. Failure to do so might lead an underwriter to turn down your loan.
When it comes to income, underwriters will look to see that you make enough to comfortably pay the mortgage each month. Bankrate says that housing costs should generally take up no more than 28 percent of your gross income. Failing to properly document income is one of the most common reasons that loans are rejected. Underwriters require tax records to back up your income claims. Gaps in employment and frequent job changing are also bad signs for an underwriter to see.
Cash Reserves and Closing Costs
Not having any cash reserves will also count against you during the underwriting process. Having enough cash to survive for a year or more can serve as a compensating factor if your application is weak in other areas. Another snag you might encounter is if you cannot document the source of your cash reserves, down payment or closing costs. The lender will need to verify the source of your funds and how long they have been in your bank account, or you may be denied the loan if you cannot supply this documentation.
A high loan-to-value ratio could spell trouble for you loan application. The higher the ratio, the bigger the risk the lender takes in the event that you default on the loan. An 80 percent or lower loan-to-value ratio will work in your favor with an underwriter. A bank appraiser might low ball the true value of the house, which could increase your loan-to-value ratio. To protect yourself, insist that the lender hires a licensed professional appraiser to conduct a physical inspection of the property.
The underwriter will base his decision primarily on these four factors. Aside from missing documentation, being slightly weak in one category alone is probably not enough for the underwriter to turn down the loan if the other areas are strong. Having positive aspects in your application that outweigh potential negatives can help an underwriter lean towards approval. Such compensating factors include a loan-to-value ratio less than 80 percent, a down payment greater than 20 percent, more than 12 months cash reserves, and a high credit score above 740.
- CNN Money: Get a Mortgage Despite Strict Underwriting
- Bankrate: What to Do When Your Mortgage Application Dets Denied
- NerdWallet: How Credit Score Affects Your Mortgage Rate
- LendingTree: What Credit Score Do You Need to Buy a House?
- Bankrate: How Much House Can I Afford?
- CLTV - Wikipedia
- Fannie Mae. "Applications & Technology: Desktop Underwriter Validation Service." Accessed July 5, 2020.
- Fannie Mae. "Applications & Technology: Desktop Underwriter & Desktop Originator." Accessed July 5, 2020.
- Fannie Mae. "DU Validation Service Checklist." Accessed July 5, 2020.
- Fannie Mae. "Form 1003 Uniform Residential Loan Application." Accessed July 5, 2020.
- Fannie Mae. "Desktop Underwriter® (DU®) Validation Service." Accessed July 5, 2020.
Currently living in Austin, Texas, Alexander Harris is a business journalist covering the self storage industry for SpareFoot.com and SelfStorage.com. Harris previously wrote daily news for RichmondBizSense.com, a business journal in his hometown of Richmond, Va. His work has appeared in various other publications including "Philadelphia Citypaper," Stateline.org, "RVA Magazine" and the "Virginian-Pilot." Harris holds a mass communications degree from Virginia Commonwealth University.