Mortgage underwriting explained

Applying for a mortgage can be hard work and for some people quite stressful.

Mortgage underwriting is an essential part of the mortgage process but this situation won’t be helped when you are told “your application is still with the underwriters“ or “we are waiting for the underwriter to approve it“.

What is a mortgage underwriter?

A mortgage underwriter works for the lender in the new business or new mortgage department. It’s their job to make sure that loans are only approved when they pass all of the lenders mortgage criteria.

For straightforward mortgage cases much of the checking is automated and carried out by the lenders software systems. This will be looking at your credit history, your employment and income status and the loan amount requested. It’s quite possible for a mortgage application to pass right through and be approved without anyone needing to be involved. These would be the simplest, lowest risk mortgage applications with a very low loan to value.

But for the more complex situations, or where the computer needs a bit of help, the application is allocated to an underwriter to begin a manual process of assessment.

The mortgage underwriter will be very experienced in knowing what to ask the borrowers for and what level of risk or tolerance the lender has. When it comes down to manual underwriting, lenders rules can have some flexibility if the loan shows itself to be profitable and within the overall risk profile that the lender has.

Remember that different lenders are seeking different types of business and much of this has to do with risk.

It’s not the broker’s job to convince the underwriter that this is a ‘great’ mortgage. But more to explain why it does not fit the normal criteria but still makes good business sense to approve the loan.

For a broker this is far more important than an AIP. If an underwriter says they can do this case as long as the borrower can satisfactorily show them; a, b and c then the case will probably be approved.

This generally does not happen when you approach a high street lender direct.

What is mortgage underwriting?

Mortgage underwriting happens once you have applied to a lender for a specific mortgage. This is not the same as an Agreement in Principle or AIP.

Depending on the mortgage type the initial assessment may be quite automated as much of your data can be searched and assessed using software. This would apply to residential mortgages and most buy to let mortgages. However, for more complex cases such as holiday let mortgages, bridging loans, SPV mortgages or large mortgages your application could well be looked after by an underwriter right from the start.

Equally if you are applying as a limited company this is most likely to be manually underwritten and processed.

Underwriters are looking into your creditworthiness, the affordability of the new mortgage and the potential risk involved should you be granted the mortgage. These aspects are pulled from the application form and your personal data and will include among other things:

• your income and expenditure
• credit checks
• bank statements
• other debts you have
• the property
• the mortgage amount requested

Lenders do vary in their approach and attitude but the following are common aspects of the assessment:

Lending criteria

If you applied online, or via a mortgage adviser, then your suitability based on the lenders criteria should already have been checked. This is a big advantage of using a broker as they will only suggest a lender when they know you can tick all of the boxes.

The criteria will include quite basic policies such as; employment, age, minimum income, deposit, loan to value.

Affordability

Lenders make their money by charging you monthly interest based on the size of your mortgage, the longer they can do this the better (for them).

But, for this to happen they need to check that you can afford the monthly mortgage repayments now and into the future. Most lenders did this anyway but the FCA have specific rules that they need to follow when checking affordability. This will naturally mean looking at your regular or average monthly income and monthly expenditure. If this is already tight, even before you apply for the mortgage, then they will probably decline the application.

Where the mortgage term goes beyond age 65 lenders will want to understand your retirement income situation. This is to check affordability for the monthly payments when you borrow money into your retirement years.

Where you have loan, bank overdraft or credit repayments the underwriter will work out your debt-to-income ratio, if this is too high then they may refuse to lend or lower the maximum mortgage offered.

If you know in advance that the affordability is a bit tight then either a guarantor mortgage or Joint Borrower Sole Proprietor Mortgage might be helpful.

If in doubt speak with your broker.

What is a mortgage stress test?

Does a student loan affect your mortgage?

Why do lenders need bank statements?

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Proof of funds

To prevent money laundering and terrorist financing in the UK lenders and solicitors are obliged to ask you to prove (exactly) where your deposit money is and where it came from. You will also need to provide proof of your identity.

Credit status

Lenders will pull your credit information from one of three credit reference agencies. Apart from looking at the raw data, if you have any debt or defaults etc, their systems will create an internal credit score, based on your whole credit profile. High is good, low is less good. This is then benchmarked against the credit score range they feel happy accepting.

There’s no way of knowing what your credit score is from a specific lender. But you can request a copy of your credit report and check that everything looks OK.

Learn more about getting a copy of your Credit Report.

Can You Get a Mortgage with No Credit History?

The property

The mortgage will be secured against your property. This means should you default on the repayments the lender will be able to forcibly sell it to repay the mortgage. So the style, condition, location and value of the property are very important to them.

Equally not all lenders grant mortgages against all types of properties. Some don’t like freehold flats or properties with flying freeholds. Others are happy to accept HMO, MUFB or holiday let accommodation.

While the underwriter may need to make checks against the property, it is the lender’s surveyor who inspects the property, provides a valuation and decides whether it aligns with the lending criteria.

Do you need a survey to get a mortgage?

Mortgages for flats above shops

Packaging a mortgage means:

• making sure all of the forms are correctly completed
• that your application does meet the criteria
• all mandatory paperwork is included
• any paperwork the underwriter has asked for is included
• ID documents are included
• A method of payment for the fees is included
• perhaps sending property details should this be important

The aim is to give the underwriters everything they may need to assess your application without the need to ask for anything else. Now of course this strategy does not work every time! But each time the lender queries an item or requests something will add to the processing time.

So, how long does all of this take? From one week to three weeks.

Once all of the checks have been satisfactorily completed, the lender will issue you with a mortgage offer. This is official confirmation that your application has been approved.

Ask your broker How long does my mortgage offer last? Offers are issued with an expiry date so be sure to work within this time-frame.

Is a mortgage illustration the same as a mortgage offer? – No, an illustration or quote is used in the early stages to let borrowers know about certain key points of a mortgage product.