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How do underwriters fit into the mortgage process?

Underwriters play a critical part in the mortgage process: They determine whether your financial profile fits your lender's guidelines. 

In a nutshell, underwriters assess the risk of giving you a home loan. Think of it this way: Lenders don't want to approve mortgages for people who are likely to fall behind on payments or default on their agreements completely. This represents a huge loss and hassle to lenders. Let's take a closer look at how underwriters fit into the home buying process.

The three Cs of underwriting 
After the loan processor gets all of the documentation in order, he sends it to the underwriter, who assesses the risk associated with the mortgage by applying "the three Cs." Penny Mac explained how each of them fit into the underwriter's decision:

  1. Capacity: Can the you pay back the loan? "Capacity" refers to your ability to handle the mortgage. The underwriter reviews your yearly income (before and after taxes), the amount of outstanding debt you owe to other lenders, your employment history and the condition of your savings, checking and retirement accounts.
  2. Credit: How have you handled credit and loans in the past? The underwriter looks for any signs that you consistently miss payments, default on loans or engage in other negligent behavior. He will assess your credit report and determine whether you managed to repay credit and loan obligations.
  3. Collateral: Does the amount specified on the loan accurately reflect the value of the home? If you default on the mortgage, the lender will want to recover that loss by obtaining ownership of the property. However, if the loan amount is greater than the house's market value, the lender won't be able to recover losses. Freddie Mac also mentioned that underwriters assess the type of property you're looking to purchase – is it a condominium? A manufactured home?

Underwriting guidelines 
Most underwriters use a set of criteria specified by government-sponsored enterprises such as Fannie Mae or Freddie Mac. As you may imagine, these guidelines can be pretty in-depth. 

For example, say you own your own business. According to Fannie Mae, the underwriter cannot include the amount of distributions on your IRS Schedule K-1 document to qualify your income. However, the underwriter can use business earnings if the distribution history is consistent with the level of company income. There are dozens of other technical details underwriters need to be cognizant of when assessing your ability to repay the mortgage. 

How long does the underwriting process take? Home Buying Institute noted the answer depends on the lender. Some aim for a 24-hour turnaround time, but such speed isn't common. Here's a rule of thumb: If the underwriter's experienced, the process may take only a couple of days. In contrast, an underwriter wet behind the ears may need a couple of weeks. 

Once the documentation's in the underwriter's hands, all you can do is wait. If you have a strong financial history, you have nothing to worry about. 

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