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Mortgage underwriting: What are “conditions” and how do I satisfy them?

Peter Miller
The Mortgage Reports contributor

Mortgage underwriting conditions

Mortgage underwriting conditions come in many forms. Often, the first underwriter you encounter isn’t even human. It’s automated underwriting software or AUS. It analyzes your application and delivers a recommendation. Then, a human takes over and here come the conditions:

  1. Your first set of conditions is the paperwork that proves your income and assets
  2. You may also have to show a divorce decree or business license or explain a credit problem
  3. Other hurdles include prior-to-documentation or prior-to-funding requirements

Your final conditions may include things like bringing in your down payment, paying off an outstanding judgment or closing certain accounts. Conditions can include just about anything that a lender needs to be confident that you can repay your mortgage as agreed.

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Common underwriting conditions

Mortgage underwriting has been much in the news because of speed and automation. It’s true that mortgage approvals can happen much faster than in the past. Lenders increasingly have direct channels which allow them to instantly get banking and tax information.

Related: 5 nosy questions to expect from your mortgage underwriter

There’s less searching for strange paperwork or missing pages with such systems. With today’s data storage options and access, borrowers can be initially approved with electronic speed.

For lenders, the story is very different. Lenders must verify that borrowers have the ability to repay the loan. They must be certain that every loan application claim made by borrowers is fully correct. Loan originators must be sure the borrower and the property meet standards established by mortgage investors and insurers if necessary.

Mortgage underwriting

Mortgage underwriters — the folks who check all the paperwork – want to see the loan go through.

Why? Lenders don’t make any money when loan applications are declined. At the same time, underwriters must protect lenders’ interests. Improperly-originated loans can mean big fines, loan buy-backs and legal claims. Mortgage underwriters are there to make sure the loan package is correct and complete.

Related: How long does it take to get pre-approved for a mortgage?

So even when the computer says “yes,” borrowers may still face hurdles. It’s best to think of all loan approvals as conditional, at least until you see a check.

Here are some of the most common conditions you might encounter.

Last-minute landmines

In a sale situation, there’s a contract between the buyer and seller. It’s filled with requirements for both parties. The term “requirements” is a nice way of saying landmines.

Does the survey show an encroachment? If a neighbor’s fence is a foot over the lot line, that’s a problem. The property — all of the property — as security for the loan, so a boundary dispute is a red flag for underwriters.

Related: Home closing (Avoid falling at the finish line)

Does the appraised value support the sale? Lenders base financing on either the appraised value or the sale price, whichever is lower. A low appraisal may mean that a buyer needs additional cash for closing. It can also mean the deal won’t go through.

Did the title search find errors in an older deed? Title problems are sometimes bizarre. It can turn out that a long-dead owner was a bigamist, a document has been forged or surprise heirs show up. Without title insurance, the lender won’t originate the mortgage.

Flood insurance

Lenders require flood insurance for homes in designated flood zones. Because floodplain maps are constantly being re-drawn, it may be that a property which did not require such coverage now does. A suddenly steeper cost may mean that a buyer no longer qualifies for financing.

Related: Flood insurance (Should you buy it even if your lender doesn’t make you?)

Alternatively, even in this age of rising seas, flood map revisions can sometimes benefit buyers. In 2016, reports NPR, “New Orleans received new flood maps from the Federal Emergency Management Agency. Overnight, more than half the population moved out of the so-called high-risk zone.”

Gifts

Gifts for down payments and closing costs are okay with virtually all loan programs. Lenders, however, can be very picky about who provides the gifts, and they want proof that the money is really a gift, not a loan. They also want statements to prove that the giver actually had the money in the first place.

Related: Is a mortgage down payment wedding gift tacky?

Underwriters require a letter from the donor saying repayment and interest are not required. They want to be certain that the money doesn’t come from anyone — lender, seller, real estate agent, or other — who directly benefits from the sale. So the seller can’t “gift” you the down payment.

Additional paperwork

Automated systems may generate needs for additional documentation.

For instance, how do you explain that job gap? Why is your work history less than two years? Your bank records show a huge deposit last year. Where did you get the money? And if you have an ex-spouse and there are children or financial support involved, prepare to provide your divorce decree.

Related: Home purchase documentation checklist

For investment properties, lenders want copies of all lease agreements. They’ll also want tax records. If the property has no rental history, the lender requires a licensed appraiser to complete a rental schedule showing the property’s fair market rent.

Quiet periods

It used to be that a mortgage approval was pretty much a final decision. That’s no longer the case. With artificial intelligence and big data, lenders now have the ability to constantly update files with new credit information. Such new technology can be a trap for unwary borrowers.

Borrowers may feel comfortable spending money once they have a mortgage “approval” in hand. The catch is that for marginal borrowers, a pre-closing spending spree can doom a mortgage application.

Related: Avoid these 7 mistakes when making an offer on a house

Do not apply for new credit or even use existing credit lines. If a loan program says you can only spend 43 percent of your monthly income on recurring debts, a larger account balance can push you over the limit. In the era of tight credit standards, new spending can move a mortgage application from “approved” to “declined.”

Underwriting conditions: one more reason to get pre-approved

There are several steps borrowers can take to prevent post-approval surprises.

First, to the extent possible, spend only cash in the period between signing a sale agreement and closing your loan. Do not add to credit card balances and do not open new accounts.

Second, check your credit report at least two months before making a mortgage application. Do you see incorrect items that might lower your credit score? Any items so old they should not be reported? Contact the credit reporting agency if you find problems.

Related: Mortgage pre-qualifications are good (but pre-approvals are better!)

Third, get mortgage pre-approval before home shopping. Have a loan officer submit a full application package for underwriting, including a credit report. See if any paperwork is missing or if any questions come up. A pre-approved buyer is almost as attractive to sellers as a cash buyer, and you’ll know how much you can safely spend.

Lastly, start a folder to hold all of your paperwork, such things as tax returns, sale agreements, leases, and payroll stubs. As new material comes in, add it to the folder so that everything is up-to-date in case the underwriter needs more documentation.

Verify your new rate (Dec 15th, 2019)