If you use a mortgage loan to buy a house, you will eventually go through the underwriting stage of the mortgage process. You might also receive requests for additional documents or information from the underwriter who reviews your loan.
But what is a mortgage underwriter exactly, and what kind of things do they ask for during the underwriting process? This guide has your answers.
Here are the 5 most important points covered in this guide:
- Mortgage underwriters work for lenders, banks, and mortgage companies.
- They evaluate a borrower’s financial profile to determine loan approval.
- They review pay stubs, W-2s, tax returns, bank statements, and more.
- They might ask for letters of explanation for certain financial transactions.
- You can expedite the process by delivering documents in a timely manner.
What Do Mortgage Underwriters Do?
A mortgage underwriter is the person responsible for evaluating a borrower’s financial situation to determine whether they qualify for a home loan. They review a variety of factors such as income stability, credit history, debt levels, and the value of the property being financed.
It’s the underwriter’s job to ensure the borrower meets the lender’s guidelines and that the loan isn’t too risky. If anything in the borrower’s application raises concerns, they might request additional documents, such as proof of income, tax returns, or explanations for credit issues.
The underwriting process typically happens after a borrower has submitted a complete loan application and received pre-approval. It’s one of the final steps before loan approval and can take anywhere from a few days to several weeks.
What Kind of Information Do They Ask for?
When you first apply for a mortgage loan (or get pre-approved), your lender will request a variety of financial documents to assess your income, assets, and debts.
Mortgage lenders typically require tax returns, W-2 forms, bank statements, and the like. But the underwriter might need additional documents to fully evaluate the home loan.
Here are some commonly requested items during this stage:
1. Letters of Explanation (LOX)
There are several situations where a mortgage underwriter might ask for a letter of explanation. The LOX (as it’s known in the industry) is a very common request. So don’t be alarmed if you receive one.
For instance, if you have a recent gap in your employment, the underwriter might request an LOX to clarify the gap and why it occurred. Other scenarios that might warrant an LOX include recent deposits into your bank account, recent credit inquiries, money transfers, etc.
2. Proof of Earnest Money
The mortgage underwriter might ask for documents that provide evidence of your earnest money deposit. This can be verified with a cancelled check or proof of a wire transfer. This is another very common request.
3. Gift Letter from Donors
If you had money donated to you from a friend or family member to help cover your home buying expenses (down payment and closing costs), the underwriter will probably need a gift letter.
This letter should be written by the person who provided the funds. It specifies the dollar amount they have provided and asserts that they do not expect any form of repayment. The donated gift money must truly be a gift, not a short-term loan.
The underwriter might also request a copy of the check or wire, to verify the transfer of funds.
4. Verification of Employment
It is common practice for mortgage underwriters to ask for a Verification of Employment (VOE). The lender usually sends this document directly to the employer, who must fill it out and return it.
Or they might give you the paperwork and have you handle it. Either way, the purpose is the same.
The underwriter wants to know your dates of employment, along with your job-related income for the last two or three years. They might also need to assess the probability of your continued employment, for the foreseeable future.
5. Sourcing Large Deposits
Mortgage lenders usually attempt to “source” all recent bank deposits over a certain amount. This means they want to know where the money came from.
They want to identify the source of the funds, hence the term “sourcing.”
In most cases, any deposit over $500 will have to be sourced. So the underwriter might ask for an LOX or other documents to verify the source of such deposits.
They do this to make sure you haven’t taken on any additional debt (like a personal loan) that would affect your debt-to-income ratio, and possibly disqualify you for mortgage financing.
6. Executed Sales Contract
You can expect your underwriter to request a copy of the signed and fully executed sales contract or purchase agreement, as well.
It’s common practice for real estate agents to deliver this document to the mortgage team. But don’t let it fall through the cracks. Be proactive and follow up. Ask your agent if they delivered the contract to the underwriter.
This list is not exhaustive. There are literally dozens of documents and letters a mortgage underwriter might ask for during the underwriting process. This list covers the most commonly requested items.
Best Practices for Borrowers During This Process
The mortgage underwriting process can be complex and time-sensitive. As a borrower, you play a key role in ensuring the process moves smoothly and without unwanted delays.
Here are some best practices to keep in mind:
1. Respond to Requests Promptly
Any delay in providing requested documents can slow down your loan approval. Respond as quickly as possible to any requests for additional paperwork or clarification.
2. Keep Your Documents Organized
Having your financial records readily available can save time during the underwriting process. Keep digital or physical copies of your pay stubs, tax returns, bank statements, and other key documents in one accessible place.
3. Be Transparent About Everything
If an underwriter requests additional documentation (which is common), be sure to provide clear and honest explanations. Attempting to hide financial issues or failing to disclose certain debts can lead to complications or even a loan denial.
4. Work With Your Loan Officer
Your loan officer is your main point of contact and can help you navigate any underwriting challenges. Keep an open line of communication, ask questions when needed, and follow their guidance on document submission and financial best practices.
5. Double-Check Before Submitting
Ensure that all paperwork you submit is complete, accurate, and legible. Missing signatures, outdated documents, or unclear information can lead to unnecessary back-and-forth, delaying your loan approval.