Essentially underwriting is just the assessment of risk. However, to those looking in, the world of underwriting seems shrouded and inconsistent. What works with one application is not necessarily guaranteed to work with another, but it is far from a random process and understanding the procedures is essential in getting mortgage applications processed quickly.
From its humble beginnings, with a signature signed underneath the terms of an agreement in a London coffee shop that was the start of Lloyds of London, the process of underwriting has gone beyond insurance and become a sophisticated matter for the mortgage market.
Underwriting is a skill and underwriters are trained professionals who must pass assessment courses before they are allowed to authorise mortgage applications. After all, we are often talking in hundreds of thousands of pounds per application, rather than a couple of thousand. Lenders want to be assured, as far as possible, that the borrower will repay the amount lent to them.
For example, if a stranger stopped you in the street and asked you to lend them £150, what would you say? If they went on to tell you how much they earn and where they live, would that make any difference? Probably not, because most people will still want to know more about that person to be certain they will get their money back.
By illustrating we are all underwriters in our own way, you can see exactly why lenders need the information that they ask for. The application form and supporting documentation provide a wealth of information that builds up a picture of the borrower to help form a lending decision. What they do, their age, where they live, what they want the money for and so on all offer clues as to the client’s character as well as their credit position.
In a bid to speed up the application process there have been a number of changes in the way underwriters interact with brokers in recent years.
Some lenders now provide direct access to underwriters to ensure mortgage advisers are able to talk to the decision-makers. This helps intermediaries to understand what underwriters want and gives them an opportunity to question decisions if necessary. Another recent change is that underwriters are often divided up into dedicated regional teams, so advisers always deal with the same people, which again helps to build understanding on both sides.
It is important to have a mutual understanding between the adviser and the underwriter to help smooth things along and there are many parts of the application process that brokers need to pay specific attention to in order to speed up the underwriting process. These range from issues that may initially take more time to find, to the basic administration procedures that should always be standard.
For example, an agreement in principle can be carried out online or by fax and provides advisers with a quick and convenient lending decision. If completed online, an answer will normally be available within two working hours. It also helps to speed up the underwriting process once the application is received, as much of the information is already on the system. Potential problems with illegible handwriting are avoided and making amendments to the online form is easy. Most lenders now offer this facility and it is definitely the key to a faster service.
Another standard requirement for credit is that brokers ensure clients provide their last three years’ address history. This enables them to make credit checks and identify borrowers with cross-referenced information. This is one of the most important elements of the underwriting process, so it is vital the client can be traced. Providing a full postal address can help to make the checks quick and efficient.
With an application for a self-certification mortgage the underwriting requirements depend on the client’s circumstances, and the lenders attitude towards self-cert. ‘True’ self-certification lenders rely on the income stated by the client and that’s it. There is no need to send random payslips or out of date accounts. If sent, the underwriters will have to review them ‘ taking more time to underwrite the application. At the other end of the scale are those who don’t state any income or make it so illegible the underwriter needs to contact the adviser for clarification. This can obviously cause a delay.
One of the key problem areas is the construction of the property. The UK has a diverse range of property construction types. Unfortunately not all properties are as desirable as each other and some provide specific risks of their own. It is for this reason lenders like to get an idea of the property’s construction before a valuation is instructed.
If the application form says the property is of standard construction, then that is what is expected. If the valuer finds it is made of steel with an asbestos roof, a mortgage will not be granted. The client’s money has been spent on the valuation and everybody’s time has been wasted, so getting the right information early can save time, money and unnecessary disappointment.
Another area which can cause unnecessary delays is the under-packaged application. The application form may be enough to get things moving, but essentials such as proof of identity documentation, statements from the existing lender and the processing fee help to speed things along. Waiting for these items can cause days of needless delay, which could have so easily been avoided.
Many brokers seem to fear the credit-scoring process, which is perhaps because they don’t understand it. Credit scoring is where details from the application are cross-referenced with credit search information and the supporting documentation to obtain a credit profile of the client. However, not everybody is suitable for the mortgage requested and whether it is based on human judgement or a poor credit profile, some applications will be turned down.
Additionally, credit scoring has helped to speed up the mortgage process. It has allowed online agreement in principle systems to be developed and reduces the processing time and requirements for self-certification lending. Some lenders talk about underwriters who make decisions solely on their own judgement, but this can lead to inconsistency between underwriters and their decisions. Overall, a combined approach of credit scoring and human intervention provides more advantages than it does disadvantages ‘ especially when you have a well-designed system.
Other issues affecting underwriters include income multiples. The 3.25 times main earner plus 1 times second earner, or 2.75 times joint income multiples have been around for years. However, some lenders now use affordability calculations, which suit the individual circumstances of the borrowers. The market will continue to find new ways of calculating the amount of loan available, so it is difficult to say whether there is a right or wrong way.
Some borrowers may be able to handle a mortgage of more than three or four times their income, but others may need to be limited to the standard 3.25. As long as the client’s financial circumstances are taken into account and they are aware interest rates may increase, then lenders should be able to put an amount on the table.
If a lender offered five or six times income without looking at the borrower’s other financial commitments, you would have to wonder whether this was in their best interest. However, there are not many lenders who would take such a casual attitude to lending, as they also want to ensure borrowers can maintain their repayments.
Many borrowers remortgage regularly to take advantage of the best rates in the market. The introduction of non-extended tie-in products has helped to facilitate this. Borrowers can choose between lower rates with extended tie-ins or slightly higher rates with no extended tie-ins.
Such choice allows borrowers to satisfy their current and future needs. If borrowers do decide to move lender on a regular basis, that is their choice. It has no bearing on the underwriting decision. The only situation where a serial remortgager may cause concern is perhaps where they are continually raising more and more money from their property over a short period of time. This may indicate cashflow problems, but it is easy to ask.
Overall, underwriting is a skill learnt by individuals and understood by companies after years of experience. Underwriting criteria is constantly reviewed to ensure it meets the needs of the changing market. But one certainty remains ‘ it is essential lenders continue to find and develop ways of identifying good clients to help as many people as possible to secure the mortgage they want.
Allen Bruce is marketing executive at UCB Home Loans
Brokers can often get direct access to underwriters to question their decisions.
Extra pieces of financial information submitted with the application will also be checked and slow the process.
Underwriters do not treat frequent remortgagers adversely, unless they are continually raising money on the property.