When a mortgage application enters the underwriting process, the information that the applicant provided is confirmed. In addition to the basic information provided on the application, an underwriter gathers official documents pertaining to the applicant's credit history, personal identification and income. Once the applicant's information is gathered and verified, an analysis takes place.
The underwriting process starts with information gathering. This phase begins when the applicant submits the initial request for a mortgage. Lenders will usually ask for personal information pertaining to identity, residential history, employment status, income, outstanding debts and financial investments. They may request copies of government issued identification, order a credit report, request copies of filed tax returns, and copies of bank statements and paychecks.
As the underwriting process enters the second stage, all of the information goes through an official verification. Some of it may be electronically verified through computerized database systems or the information may be manually verified by the underwriter himself. Outstanding debt balances and payment histories could be verified by phone calls to the lenders. Credit reports will most likely be examined for any indications of financial instability.
Once the information on the application is confirmed, the lender will order an appraisal of the property. This step in the underwriting process involves participation from both the lender and the borrower. A home inspection is also required and is usually initiated by the loan applicant. The appraisal is to reassure lenders that they are not lending out more money than the home's current market value, while the inspection ensures that the home and its major systems are in good condition.
If for some reason the home appraises at a value lower than the agreed upon sale price, the seller might need to lower the price in order for the buyer to secure lender approval. Modifications to the sale agreement need to occur between the buyer and seller's real estate agents before the underwriting process can proceed. If the inspection turns up items that deflect from the home's value, such as roof leaks, these items might also need to be corrected prior to loan approval.
The final step that underwriters take is the analysis of the borrower's information. Underwriters need to determine whether extending the loan makes solid financial sense from the lender's perspective. A debt to income ratio analysis may be conducted, in addition to determining the percentage of the applicant's gross monthly income that will be required to make the loan payment. If extending the loan makes sense to the lender, they will recommend approval for the mortgage application.