Underwriting is critical to any loan process, yet underwriters only deny loan applications 9.3% of the time. The top reasons: the applicant’s credit history, credit score, collateral, and pending debt.
But that’s not all.
Another common reason for denials is incomplete credit applications.
This is why underwriters must understand which documents are necessary, as well as inform applicants of the process and what’s required of them in order to improve the odds of approval.
Let’s review the underwriting documents you’ll need to request to ensure and how to make the process smooth for everyone.
How does the underwriting process work?
Underwriting involves assessing the risk of lending money to a client. So, as a lender, bank, or credit union, you must determine the borrower’s creditworthiness before approving their application.
An effective underwriting and loan approval process reduces undue risks and enhances your portfolio quality. Essentially, the underwriter will review the borrower’s financial situation to identify how much risk you—the lender—will take on if you approve the loan.
If your client is in the market for a purchase or refinancing loan, then advise them on what personal or financial documents they’ll need to bring. The underwriter will use the information in those documents to verify the borrower’s assets, debt, and income. Before approving or declining the application, they’ll review the borrower’s:
- Credit score
- Cash reserves
- Investments
- Tax returns
- Bank statements
- Credit card expenditures
- Title search
- Property appraisal
A thorough review requires the borrower to submit as many documents as necessary for their application. This is useful so the underwriter can verify their identity, check their credit history, and assess their financial status, ensuring that all the information provided is accurate.
Most lenders use a mix of human expertise and technology to analyze a borrower’s loan application to determine approval and interest rates. The underwriting process reveals three main things to about the borrower, such as their ability to:
- Repay the loan plus interest
- Meet their financial obligations and pay on time
- Stay afloat and make payments in case of unplanned events like recession, natural disasters, or other revenue disruptions
Depending on how the borrower measures up, the lender may either offer them several financing options, suspend the application, or deny the loan altogether. Suppose an underwriter determines the borrower is creditworthy. In this case, they’ll advise you—the lender—to accept a low level of risk when extending the loan.
If the underwriter denies the borrower’s application, you can advise them to improve their finances before applying again.
What documents do you need for the underwriting process?
Ideally, lenders should request several documents to determine approval or denial of the borrower’s loan application.
The correct paperwork required for loan underwriting and what you’ll examine vary depending on your underwriting process. But typically, lenders request a specific set of documents to expedite the process based on these three phases:
- Prequalification
- Application
- Closing
Here’s a closer look at each.
1. Prequalification
At this stage, the borrower submits a short application to determine which loans and amounts they’ll likely qualify for.
Before pre-qualifying the borrower for the loan, you can send document requests to verify their:
- Monthly income
- Home and mailing address
- Preferred loan amount and deposit
- Co-applicants (if needed)
- Permission to review their credit report
- Information about assets and liabilities
This basic financial information helps you estimate how much the borrower can afford, then give them a prequalification confirmation letter for the loan.
This leaves the borrower with a ballpark estimate. But a letter doesn’t carry as much weight as a preapproval, which usually involves the underwriter verifying their information, credit score, and financial documents.
2. Application
The borrower is now ready to apply for the loan. Before they submit the application, ensure they’re equipped with the following documents and information:
- Credit history and score: Request permission from the borrower to check their credit score. This usually reflects their credit history and helps you determine how much risk they carry. You can also review alternative credit data to determine credit worthiness.
- Identification and resident status: The borrower may need to supply a social security number (SSN) so you can associate their loan application with their credit history and verify their loan application eligibility. Plus, you can determine what other documents you might need to request from them.
- Proof of income: To properly assess the borrower’s risk, they’ll need to show proof of income. This includes providing documents like pay stubs and employment history (past two years) to verify their employment situation, or other forms of income. You can also ask for proof of rental payment to check for missed payments from the last year.
- Tax returns: The borrower’s complete tax returns can help you verify their reported income, check for unpaid taxes, and review their financial history and current financial status.
- Copies of bank statements, assets, and liabilities: Financial documentation helps paint a picture of the borrower’s finances. When assessing risk and how much you’re comfortable lending, you’ll look for a healthy balance of the borrower’s assets and liabilities.
In some cases, the borrower may attach copies of gift letters, which they received from loved ones or other people contributing financially toward their loan. This ensures you don’t perceive such gifts as competing loans that may affect the borrower’s loan application.
Be careful when reviewing financial documents, such as pay stubs, W2 forms, bank statements. Some applicants may submit fake documents, which could spell trouble for your financial institution.
Fortunately, you can use tools like Inscribe—an AI-powered fraud detection and automation platform. It makes the loan application process frictionless for your organization and customers.
Inscribe helps your underwriting team with everything from collecting and verifying documents to providing credit insights and uncovering fraud that’s invisible to to the human eye. Inscribe picks out fraudulent documents within seconds and knows what's been altered, reducing fraud losses and unnecessary risk.
3. Closing
After working through the prequalification and application stages, most borrowers are relieved to reach the closing phase.
Getting to this last step in the financing application process (also known as the settlement) means the underwriting, document verification, and offer are complete.
The borrower is about to get the loan they need and they’ve signed the closing disclosure—an itemized list of the total amount the borrower will pay at or before closing. This list typically includes the:
- Loan amount
- Interest rate
- Origination fees
- Loan term
- Deposits for insurance and taxes
- Title insurance
- Homeowner's insurance
- Any other fees
That said, being cleared to close doesn’t mean the borrower is done. They’ll still need to complete some final steps. In addition, some lenders may decline the borrower at this stage due to drastic changes in their financial situation, employment status, or extra debt.
Before the borrower becomes responsible for the loan, they must submit the following documents:
- Recent bank statements, pay stubs, business tax returns, and other income and asset verification documents
- Copy of signed purchase agreement
- Documented explanation of unusual changes in their financial situation
- Proof that the borrower hasn’t taken on more debt
- Gift letter showing money gifted from loved ones or other people
Inscribe also adds intelligence to your existing document checks and automatic decisioning. So with it, you can create rules for automatically accepting, rejecting, or getting notified when to review documents to make clearer, fact-based decisions.
You’ll then give the borrower a commitment letter, which spells out the underwriting conditions they need to become clear to close (including the above documentation). The commitment letter assures the borrower will get the loan, but they may need to meet certain final conditions before being clear to close.
In most cases, the borrower or applicant won’t have to wait too long for approval if you’ve cleared them for the loan. However, closing timelines vary depending on the roadblocks you encounter between the time you clear to close and the settlement itself.
Deliver a smoother underwriting process with Inscribe
The loan underwriting process is critical to any lender, but requires adequate preparation to make it less stressful.
The key is getting organized with the right checklist of documents you'll need from borrowers at each stage of the process, and requesting the paperwork early to ensure smooth closing.
With Inscribe, you can ease burden for you and your clients throughout the underwriting process, as well as identify fraudulent activities, which may be harder to track with manual document review methods.
Ready to improve your underwriting document collection? Reach out to one of our experts to see how Inscribe can deliver a hassle-free underwriting process.
