Mortgage underwriting can be one of the more obscure parts of the lending process. Borrowers know a lot about the application stage because they are actively involved in it. Likewise, they are generally aware of what takes place at closing because they are present for the process. But it is this middle stage, known as underwriting, that raises a lot of questions among home buyers. Today, I’d like to explain what happens during the underwriting process for FHA loans, and what the underwriter looks for when reviewing applications.
Let’s start with a basic definition. An FHA loan is a type of mortgage product that is insured by the federal government. The Federal Housing Administration insures loans made by lenders within the private sector. Because of this insurance, lenders are more willing to relax certain guidelines such as credit scores and debt ratios. This, along with the lower down-payment requirements, is what attracts borrowers to the program.
The FHA lending process can be broken down into four primary parts — application, underwriting, approval and closing. Underwriting takes place after the loan officer has assembled the application and originated the loan. The file then moves on to the FHA underwriter who carefully reviews it to make sure it meets the lender’s minimum guidelines.
What Does the Underwriter Look at? In a Word, Everything
So, what does the FHA underwriter look for? His primary goal is to make sure the loan is insurable. He or she will check to see if it meets all of the Department of Housing and Urban Development (HUD) requirements for the FHA mortgage-insurance program. If a lender originates a loan that is later found to be “non-compliant” in some way (meaning it falls short of HUD’s minimum guidelines), it might not be fully insured. And if that loan goes into a default status because the borrower fails to repay it, the lender could suffer a loss. To prevent this from happening, the FHA underwriter will look at all documents relating to the loan, to make sure they meet HUD’s minimum standards.
The underwriter will also check to see if the borrower meets the lender’s minimum criteria. In order to qualify for an FHA loan, you actually have to meet two different sets of criteria – the government’s (HUD) as well as the lender’s. Banks and mortgage companies can impose their own guidelines on top of those issued by HUD, and their guidelines might be even stricter.
- So the FHA underwriter will look at the loan from an insurance standpoint, to ensure that it meets all program guidelines.
- He or she must also review the loan documents to make sure the borrower measures up to the lender’s minimum guidelines.
What to Expect during the FHA Underwriting Process
Here’s what you can expect during the FHA underwriting stage, as a borrower. In a typical scenario, the borrower does not even hear from the underwriter — at least not directly. If he/she encounters any issues, those issues will be passed along to the loan officer who in turn will communicate them to the borrower.
If you’re lucky, you will sail through the process without any snags at all. But don’t be surprised if a few obstacles pop up along the way. Remember, the FHA underwriter must look at a wide variety of documents and requirements to ensure loan compliance. So there’s a good chance he or she may need additional information from the borrower to complete the review. These are commonly referred to as “conditions.” A conditional approval is one that requires additional actions before a final approval can be given.
For example, the FHA underwriter might request a written explanation from the borrower about a certain bank withdrawal. This is one example of a condition. In this case, the loan might be approved upon successful resolution of this particular issue or condition. So the borrower provides the written explanation as requested, and the loan moves forward (ideally).
In other cases, the FHA underwriter might discover an issue that cannot be resolved. Maybe the borrower’s credit score is too low to meet the lender’s criteria. Maybe the borrower does not have sufficient funds in the bank to cover the down payment and closing costs. Maybe the borrower’s debt ratio is too high. There are a wide variety of issues that can arise during the underwriting stage. It is the underwriter’s job to determine whether or not they are “deal breakers.”
Common Checkpoints and Documents
Here are some of the things the FHA underwriter will look for during this process:
- The borrower’s credit scores and (possibly) credit reports
- Debt-to-income ratio, or DTI
- Bank statements that show current, verified assets
- Pay stubs that show year-to-date earnings, and other employment documents
- Statements / documents relating to other assets such as retirement accounts
- IRS tax returns and W-2 documents
The underwriter will examine these and other documents to ensure that the loan meets both the lender’s and the Federal Housing Administration’s minimum guidelines. If the borrower checks out in all of these areas, the underwriter will assign a “clear to close” label, which means the loan can move forward to closing. Or he might issue a conditional approval with certain things that need to be resolved by the borrower. Or he might recommend that the loan be denied entirely. It can go one of three ways at this stage.
As a borrower, the best thing you can do is stay in close contact with your loan officer, and make sure the underwriter has everything he or she needs to complete the review process. And if you do get a list of conditions that must be resolved, take action immediately. The ball will be in your court at that point. If it takes you a long time to satisfy the conditions, you might end up delaying your own closing. So keep in touch, and stay on top of any issues that arise during the process.
Disclaimers: This article explains what an FHA underwriter looks for during the loan review process. This is a general overview of events and does not include every possible underwriting scenario. Every mortgage situation is different because every borrower is different. There are many different kinds of issues that can arise during this process, but they cannot all be covered in one article. This information has been provided for educational purposes only and should not be viewed as financial advice. The only person who can tell you whether or not you qualify for FHA financing is a HUD-approved mortgage lender.