Underwriting is a process by which lending institutions, such as banks and insurers, determine whether a client is eligible to receive a loan. During the underwriting process, the lender goes through the client’s information and background to determine the risk involved in lending the money.
Lenders may consider the following factors during the underwriting phase:
- The borrower’s credit history and score
- The purpose for which the money is supposed to be used
- The amount of money in question
- Repayment terms (i.e., payment dates, interest rates, etc.)
Lenders may even use complex formulas or computer programs to assess risk, as the final decision on whether or not to approve a loan rests with them.
What Is a Mortgage Underwriter?
Mortgage underwriters are financial experts employed by mortgage lenders. A mortgage lender will hire a mortgage underwriter to determine how much financial risk a borrower carries. They may also calculate the percentage of probability that the borrower will default on a mortgage loan.
To accomplish this task, the mortgage underwriter examines the borrower’s finances and reviews their mortgage loan application. Mortgage underwriters also decide whether to approve or reject a borrower’s mortgage loan application. Since mortgage writers rarely interact with borrowers in person, this concept may overwhelm them.
A mortgage writer uses the facts from their assessment to approve or reject a borrower’s application. Mortgage underwriters may consider the following factors when making their determination:
- The borrower’s credit reputation: A borrower’s credit reputation consists of several details, such as their credit score or overall credit history. Other factors that may indicate a high-risk borrower include:
- If the borrower has prior delinquent mortgages,
- If the borrower has applied for a new line of credit within the last year;
- If the borrower has declared or filed for bankruptcy; and
- If the borrower has liens or judgments against their property or previously owned a house that was auctioned off at a foreclosure sale.
- The borrower’s collateral: A borrower’s collateral may concern how much they contributed to the down payment on a home and how much money the borrower still owes in equity. A mortgage writer will also consider what type of property the borrower is acquiring and what the buyer intends to do with it (e.g., primary residence, vacation home, extra income, etc.).
- The borrower’s capacity: A borrower’s capacity refers to their ability to make payments. For example, an underwriter may examine a borrower’s income and savings account balance. Underwriters will also likely consider the following details:
- Whether a borrower is self-employed or is a salaried employee;
- The amount of debt that a borrower has versus their salary and monthly expenses;
- Whether the borrower has any other debt concerns or financial liabilities;
- The type of loan the borrower is applying for (e.g., short term, long term, fixed rate, adjustable rate, etc.);
- Whether the borrower has any additional assets; and
- The number of borrowers applying for the mortgage loan.
In their work, mortgage underwriters take into account various factors. Underwriters may also consider other details, such as how long a borrower can continue making payments if they lose their job, depending on the borrower’s financial situation.
Borrowers may also be asked to have their property appraised by mortgage underwriters. By doing this, the borrower can avoid accepting a loan amount higher than the property’s worth.
Furthermore, a mortgage writer may ask for a copy of a borrower’s recent tax return, bank statements, student loan documents, pay stubs, and any paperwork associated with the property they intend to purchase (e.g., a signed offer) with the loan.
Depending on the amount of paperwork an underwriter has to sort through, the process of underwriting a mortgage can take a couple of days to several weeks. It is assumed that any documents that need to be signed contain the signatures of the appropriate parties and that the borrower has all of the required paperwork.
As discussed above, mortgage underwriters are involved in many aspects of the mortgage loan process. Their decision determines whether or not a mortgage loan application will be approved and accepted by the lender.
Consequently, if you believe that a mortgage underwriter made a mistake or if you are in dispute with a mortgage underwriter, you should contact a local mortgage lawyer right away.
Legal Consequences for Mortgage Underwriter Violations
A mortgage underwriter can face several legal consequences for committing a violation.
A mortgage underwriter may receive the following types of legal consequences for a violation:
- Having to pay civil fines or penalties;
- Having to pay monetary damages, such as actual damages or punitive damages, if a borrower successfully sues them;
- Having to pay a borrower’s court costs or a reasonable sum of lawyers’ fees;
- Receiving a court order to reconsider a borrower’s mortgage loan application;
- Having their professional license suspended or revoked;
- Having to pay criminal fines or restitution;
- Being placed on probation; and
- In rare cases, having to serve a jail or prison sentence.
A criminal penalty is usually only imposed in mortgage fraud cases. A mortgage writer convicted of mortgage fraud may serve anywhere from a few months to thirty years in prison. Generally speaking, the sentence will depend on the severity of the crime, the type of crime committed, and the circumstances surrounding the case.
Borrowers can avoid becoming victims of a mortgage fraud scheme by performing due diligence on a particular mortgage underwriter or a lending company before they agree to do business with them.
Any suspicious actions or lending policies that contain questionable requirements should also be reported to the appropriate authorities. For further guidance, borrowers may contact a local mortgage lawyer if they are not sure who the proper authority is.
What Is Real Estate Underwriting?
Underwriting is primarily used in approving mortgage loans in real estate.
Underwriting a mortgage is similar to underwriting a personal loan or a business loan.
However, real estate underwriting is unique because the lender must usually work with a property appraiser to evaluate the property in question, not just the borrower’s background. This is because part of the risk involved in a mortgage loan involves the property’s condition and any potential title defects.
What Are Some Common Legal Issues Involved in Underwriting Claims?
Underwriter liability can sometimes be a legal issue in certain underwriting claims. They can go in either direction: approving loans that shouldn’t be approved or denying a person a loan that causes them losses (common in business). Depending on the person’s income, an underwriter may be held liable for mortgage fraud if they approve a loan that shouldn’t have been approved.
The underwriter may be liable for monetary damages for losses caused by its actions. More serious violations can result in state or federal charges.
Do I Need a Lawyer for Underwriting Issues?
Underwriting is often a complex, detailed process. You may need to hire a qualified mortgage lawyer near you if you need assistance obtaining a home loan or underwriting issues.
Your attorney can help guide you through the process and may assist with negotiations. A lawyer can also represent you in court if you need to file a legal claim. Lastly, if there are any changes to the law that might affect your claim, your attorney can provide you with updates on your legal options.