What Does Underwriting Mean?
Sep 5th, 2007 @ 9:46 AM by MortgageMentor
I received this question from a client the other day. Many of us who live and breathe mortgages daily often forget that our clients don’t necessarily know the lingo we use.
According to Dictionary.com, underwriting means “to bind oneself to contribute a sum of money to (an undertaking).” From a lending perspective, underwriting means the bank is evaluating the risk associated with your loan and will either accept that risk by making a loan to you or deny it. The two outcomes of underwriting are loan approval or loan denial.
Lenders employ underwriters who are trained at evaluating loans originated or procured by mortgage brokers and loan officers. Underwriters are looking to ensure that the loans fit within the lenders required risk profile and also for signs of fraud and other misrepresentations. Some might argue this hasn’t been the case over the last few years, but that is another topic.
With the advent of technology, most mortgages are underwritten using Fannie Mae’s Desktop Underwriter/Originator or Freddie Mac’s Loan Prospector. These systems allow brokers and loan officers to submit a mortgagee’s credit, assets, income and other pertinent information online and in turn, to receive instantaneous feedback as to whether the loan meets Fannie Mae or Freddie Mac’s risk parameters. For the most part, as long as the appropriate documentation can be provided to the underwriter, the loan will be approved if it passes successfully through an automated underwriting engine.
Once the loan lands on an underwriter’s desk, the underwriter may ask for additional supporting information known as “conditions”. For example, the loan officer may have left out the borrower’s pay stub. The underwriter will conditionally approve the loan, but the pay stub will be required prior to closing. Once all the conditions have been satisfied, the lender issues a “loan commitment” that says they are agreeing to lend you X amount of money at Y terms and you can now go to closing.
It is important that consumers understand that mortgage brokers and loan officers DO NOT approve mortgages. A good mortgage broker or loan officer should be able to tell you with reasonable accuracy if your loan will be approved, but they do not have the authority to actual approve the loan. Loan approvals can only come from an underwriter.
If your broker or loan officer is saying that you are approved, they should be able to at a minimum, provide the “findings” from the automated underwriting engine. Preferably though, they should show you the file that has actually been underwritten with a signed approval from the underwriter listing conditions.