What is Mortgage Underwriting?
In simple terminology, mortgage underwriting can be defined as a risk assessment that is undertaken by the lender to assess the underlying probability of the debtor not honoring the particular loan. Before a loan is formally extended, it is imperative for the mortgage underwriter to ensure that the creditworthiness of a particular loan applicant is properly conducted, in order to manage the risk portfolio within a reasonable threshold.
Mortgage underwriting is considered to be a cumbersome task, with many processes involved. The first of these processes include collecting all the necessary documents for the application. Followed by this, it is important to ensure that all identification is properly verified, along with credit history checks, so that a proper financial situation can be properly addressed. This mostly includes income, cash reserves, equity investments, financial assets, and other factors. Therefore, there is a multitude of factors that need to be taken into consideration by the mortgage underwriter in order to ensure that he is able to achieve the respective tasks at hand.
The process of mortgage underwriting is undertaken by a mortgage underwriter, who partakes the responsibility of ensuring that all the necessary protocols have been met before the loan application is approved.
What does the Mortgage Underwriter mainly do?
The task of the mortgage underwriter is to assess the risk. The role begins when an individual (or potential homebuyers) fills out an application requesting a loan on a certain property they might want to purchase. Subsequently, this process ends when the underwriter is able to accurately gauge if the request is supposed to be approved, suspended, or declined based on the documentation collected and analyzed by the mortgage underwriter.
As mentioned earlier, it can be seen that the primitive task of the mortgage underwriter is to assess the underlying delinquency risk. This implies that the underwriter needs to iterate the possibility of the lender being unable to pay back the loan. In order to be able to accurately calculate the likelihood, the underwriter takes into consideration a number of factors, which mainly include the following:
- Credit Score
- Credit Report
- The property for which the mortgage loan is being drawn
Followed by this, the underwriter is supposed to document the assessment, in addition to weighing different elements of the loan application to decide on the acceptable level of risk.
Automated Vs Manual Mortgage Underwriting
Automated underwriting has recently increased because of the relative accuracy with which it claims to assess risk. Automated underwriting, as the name suggests, mainly uses software to assess the existing level of risk. Using the inputs from the loan application is used to issue a provisional underwriting decision. The software can be used to automatically update and approve the loan application. However, there might be instances where the application is referred to as a manual underwriter. In the case where the automated mortgage underwriter is unable to conclusively comment on the existing risk profile, the role of the mortgage underwriter considerably increases.
Even in the cases where automated mortgage underwriting renders a definite answer, manual underwriting is still carried out in order to further reconcile if the assessment derived by the automated software is consistent with the documentation that had been submitted by the applicant.
How does a Mortgage Underwriter evaluate the risk?
It can be seen that various mortgage underwriter assesses the inherent level of risk in the mortgage process by considering a number of factors. Some of these factors are enlisted below:
- Level of Income: The first and foremost assessment that is undertaken by a mortgage underwriter is to assess if the applicant has a steady stream of income. This needs to be accounted for in order to gauge the overall likelihood of paying back in time. It is important to consider this because unless there is a steady income coming in, the risk factor exponentially increases.
- Assets: The underlying assets of the applicant are also a very important assessment that is undertaken. This mainly includes evaluating if there are enough assets that can be used as reserves, in case there is negative volatility in the income stream. This includes both cash, as well as non-cash reserves that can be used in order to estimate the overall viability of the assets in play.
- Credit Rating: Credit Score and Credit Rating is perhaps the most important and crucial determinant that is used by mortgage underwriters in order to assess the past record of the applicant. Some of the lenders have stringent credit rating requirements, below which they might not be able to extend the loan.
- Debts and Other Liabilities: Debt is another important phenomenon that should be accounted for by mortgage underwriters. In the case where the applicant has a higher number of debts and other liabilities, it is considered a red flag. Too many debts or liabilities increased the inherent risk of the lender, and therefore, this is considered to be a no-go area.
How to Become a Mortgage Loan Underwriter
There are no stringent and very specific requirements that are needed to become a mortgage loan underwriter. However, there is a preferable course of action that can be adopted by the pursuant in order to streamline their career in the respective field.
- Getting a business-related degree: Even though a business-related degree might not entirely cover the entire scope of being qualified as a mortgage underwriter, yet it can be seen that it helps in giving a holistic idea regarding how business works.
- Getting an Internship in a bank: The best place to learn about underwriting and risk assessment is at a bank. It is important to consider the fact that these internships tend to give a more practical insight into how risk management works in these financial institutions. Furthermore, it is important to consider the fact that the experience gained at the internship might help to decide and further evaluate if mortgage underwriting is the way forward.
- Studying to read and evaluate credit reports: This tends to be another important element that should ideally be undertaken by mortgage loan underwriters. By reading credit reports and credit histories, mortgage loan underwriters are able to understand the various risk factors that have been previously highlighted in order to gauge the level of risk involved in a particular transaction.
Therefore, it can be seen that it is imperative to have certain finance or business-related background in order to ensure that there is proper clarity regarding the job description and the ground that needs to be covered in this aspect. It is also important to ensure that there is a proper idea regarding how to access the level of risk, in order to deliver a proficient analysis of the risk involved with setting up the mortgage agreement.
However, the primitive step is to secure a job either in the bank, or a financial institute, and then plan the trajectory from there onwards. It is also helpful to take certifications, and courses in the field of underwriting, so that some hard skills are developed over the course of time. Experience tends to be the key to becoming a proficient loan mortgage underwriter because this is something that greatly builds the analytical capability with passing time. Additionally, having soft skills like communication, is also important, just like it is for any other field of work. Therefore, the ideal approach of candidates should be to develop both, hard skills, as well as soft skills.