Stages of Underwriting
Underwriting serves as the final review of a borrower’s loan file. There are two phases of underwriting that buyers should understand. Buyers enter the first stage of underwriting during preapproval.
VA lenders generally rely on an “Automated Underwriting System,” or AUS, to determine a buyer’s preapproval status. An AUS is a computer program that instantly evaluates a buyer’s eligibility, based on a variety of factors.
Not every qualified borrower will obtain AUS approval. In those cases, lenders may consider a “manual underwrite,” which is a more involved process that typically utilizes more stringent requirements.
Different lenders can have different requirements, but, generally, things that can trigger a manual underwrite include a previous bankruptcy or foreclosure; default on federal debt; late mortgage payments; and more.
In addition to the AUS evaluation, lenders will re-examine a buyer’s qualifications during the second stage of underwriting.
Once you’re under contract, your lending team will start working to verify and update key information. The goal is to get your loan file as complete as possible before it heads to a lender’s underwriting staff.
These are real people looking at your financial and credit information, your contract, your appraisal and other key documents.
The Underwriter’s Job
Underwriters have an important job. They’re here to ensure the lender is making a good investment. Underwriters will go over your loan file with a magnifying glass. It’s their job to make sure your file meets all the requirements, and that you’re a safe bet when it comes to making those mortgage payments on time, month in and month out.
Why are lenders so cautious? Haven’t you been through enough scrutiny by now?
Well, remember: The federal government insures a portion of every VA loan. That financial guaranty helps lenders avoid a total loss in the event a borrower defaults. Lenders that deviate from VA rules lose that insurance. In addition, lenders often need loan files to meet additional requirements in order to sell them on the secondary mortgage market.
Underwriters will comb through your loan file to ensure every “t” is crossed and every “i” is dotted, both to satisfy the VA’s requirements as well as any in-house ones set by the lender.
After reviewing your file, an underwriter will typically do one of three things:
One, they can issue a conditional approval of your loan. This usually means you’ll need to provide additional documents, answer questions or correct errors in your file before being able to move forward.
Two, they can issue a clear to close, which means your loan file is clean and you’re ready to close on your new home. It’s rare for a loan file to get a CTC, as it’s called, the first time it goes to an underwriter.
Third, an underwriter can deny your file outright. This is also a rare occurrence, and it’s not likely to happen if you’re working with a good loan officer who knows VA loans.
Every lender and every loan file is different. But, broadly speaking, a conditional approval is the most common outcome and traditionally the next step.
Having some conditions on your loan file is common. Homebuyers rarely sail through the underwriting process without them.
Often, these “conditions” are simple issues that borrowers can quickly clear up, sometimes in the same day. Your loan officer might ask you to write a “letter of explanation” that addresses a specific question or problem, like why you had a late mortgage payment or what led to your recent short sale. Lenders may also be waiting on third parties to verify things like your tax returns or income documents.
Underwriters may request things like additional pay stubs or more tax returns before issuing final approval. There are hundreds of possible conditions. Again, every loan file is different.
But here are a few common questions underwriters will often consider:
- Has the borrower’s income and employment situation changed? Lenders will conduct a verification of employment (VOE) no more than 10 days before closing.
- Has the borrower made any large bank account deposits that need further documentation?
- Does the borrower have a “clear” CAIVRS? Anyone presently delinquent or in default on federal debt can’t be considered a satisfactory credit risk. Underwriters will confirm that the borrower is in the clear or that there’s a satisfactory repayment plan in place.
- Are there any judgment liens against the borrower’s property? These would need to be repaid or otherwise satisfied before a loan could close. Unpaid debts or liens with the IRS that don’t appear on your credit report can still show up on title work later in the loan process.
- If the borrower is currently a homeowner, have they been late on any mortgage payments in the last 12 months? Some lenders may allow up to one 30-day late payment in the last year, but others will require at least 12 consecutive months of on-time payments.
It’s important to understand you’re not being targeted or picked on if there are conditions on your loan file.
The underwriter’s job is to protect the lender. But lenders who don’t actually make loans have a tough time staying in business. It’s a balancing act.
If you’re asked to provide additional documents, strive to get them back to your loan officer as soon as possible. Also, be sure you’re sending exactly what the lender needs. Sending incomplete or illegible documents can delay the process. Talk with your loan officer if you have any questions about what’s needed.
The faster you move, the faster your lending team moves toward resolving the conditions and getting you to closing day.
Once the underwriter is satisfied with all of your paperwork, the lender issues a clear to close. The lender will send your loan documents and paperwork to the title company to prepare for your loan closing.
Your homebuying journey is nearly at an end.