Did you know that the underwriting process in the Mortgage Industry got affected by COVID-19? Businesses went bankrupt, people lost their jobs, and the underwriting process was also affected by the pandemic. The financial situation of the borrowers also added to the lender’s woes. Lenders had to make sure that the borrowers’ loans did not default. With social distancing being the norm, the Underwriting process has also undergone a lot of change. In this blog, we will discuss the ways to improve the underwriting process in the Mortgage Industry.
Mortgage Underwriting is a component of Mortgage LOS. The stages involved in the Loan Origination System are below.
Figure 1: Stages in Mortgage LOS
What is the Underwriting Process? How does it work?
When applying for a mortgage loan, an underwriter will determine the financial credibility of the applicant. An underwriter verifies an applicant's income, assets, credit, debit, and property details. The underwriting process has faced many changes and adopted guidelines. Government-backed entities such as Fannie Mae and Freddie Mac specify the underwriting guidelines that have to be complied with by Mortgage Lenders. Revised temporary requirements for underwriting borrowers with self-employment income is one of the adopted guidelines for the underwriting process. There are further guidelines introduced in 2020 that we can examine on Freddie Mac’s Website.
Factors affecting the Underwriting Process
Underwriters have to assess the overall risk if the applicant does not pay the mortgage loan. To do so, the underwriter evaluates factors that help mortgage lenders understand the applicant’s finances. Lenders check if the applicants are qualifying the “four C’s”of the Underwriting Process.
1. Capacity:An underwriter analyzes the capacity of a borrower to pay back the loan. Lenders analyze the borrower’s Debt-to-income (DTI) ratio. The DTI ratio is calculated by adding all the monthly debt payments and dividing it by the gross monthly income. An underwriter examines the DTI ratio and ensures that the borrower can take the loan and repay it comfortably.
2. Capital or cash:Lenders will review if the applicant has enough cash or savings other than income to pay back the mortgage loan. Capital, in the form of investments, properties, and other assets,is sold for readily available cash.
3. Collateral:Collateral refers to the security of the loan in case there are no repayments by the borrower. The underwriter can order an appraisal of a property to make sure that the amount given as a loan for the home matches the home’s actual value in the market.
4. Credit:The Credit score and history of the borrower is analyzed to predict the borrower’s repayment of the loan. The Underwriters look at the borrower’s credit score and search for any late payments, bankruptcies, overuse of credit, and any other discrepancies.
Figure 2: The 4C’s of Underwriting Process Image https://www.arborfcu.org/Learn/Education/Blog/February-2019/How-Much-Home-Can-I-Afford
Based on their findings, the underwriter can deny, suspend, or approve the mortgage application.
Figure 3: Underwriting Process decisions
Ways to improve the Underwriting Process
The Underwriting Process can take a few hours or days based on the type opted by the mortgage loan providers. Underwriting could be automated, manual, or integrated (that is automatic and manual) type. Automation is a way to improve the mortgage underwriting process. We have previously discussed how Mortgage Process Automation is transforming Mortgage transformation in our blog.
Automated Mortgage Underwriting
Many automated Underwriting tools are available for the Mortgage Industry. Automated Underwriting involves the use of Artificial Intelligence (AI) in deciding the grant of mortgage loans. Mortgage Loan Officers may use the underwriting software to collect the applicant’s information, analyze it, calculate the potential risks, and recommend the decision to be taken regarding Loan approval. The Underwriting Process has improved with the use of AI tools such as OCR or Optical Character Recognition, Natural Language Processing, and other machine-learning algorithms. Moreover, cloud computing has made the Underwriting process faster and cost-effective compared to manual Underwriting.Tools such as live chat, screen sharing, context-sensitive notes are increasing the efficiency ofthe automated underwriting system. Customized Automated underwriting systems have helped the applicants in faster processing of loans.
Figure 4: AI-augmented underwriting System-an example Image https://www.rgare.com/knowledge-center/media/articles/wired-to-underwrite-artificial-intelligence-and-underwriting
Integrated Manual Underwriting Process with Automation
Manual Underwriting, as the name suggests, is done by a human and not by a computer system. Sometimes, the application does not fall in the criteria used by automatic Underwriting. Then the application is referred to the Manual Underwriter. So, by integrating the Manual Underwriting Process with automation, a human can evaluate the application using digital documents.
Speeding up Manual Underwriting
Another way to improve the Underwriting Process is by providing additional documentation as required from the applicant as soon as possible. A delay in sending documents to the underwriter delays the entire loan process. By responding quickly and accurately to the underwriter’s queries, the time taken for the underwriting process gets reduced.
Mortgage LOS and Underwriting
Mortgage LOS platform streamlines the mortgage Underwriting process with automated lender follow-ups. The software in the Mortgage LOS analyses the applicant’s documents to automatically flag issues or any potential risks that may arise during the Underwriting Process. Mortgage LOS provides compliance with the federal regulations as it has the rules incorporated into the underwriting workflow. The power of analytics combined with the underwriting process data gives proof that the mortgage lenders are complying with the federal regulations.
inflooens has the best Mortgage LOS which has modernized the underwriting process by using Mortgage Process Automation.
With innovation in financial services by using AI and ML technology, the time and cost incurred in the underwriting process have reduced. Automated Underwriting systems incorporated into Mortgage LOS have caused Mortgage Transformation. Providing timely responses to the underwriter will help the approval process to move at a faster pace.
inflooens’ Mortgage LOS has streamlined the underwriting process. It has automated all the paperwork of the loan applicants to save valuable time and provides a hassle-free post-closing process.