You’ve located the perfect house for you, complete with a large kitchen, the correct number of bedrooms, and a yard. So, how can you get from being a serious shopper to becoming a happy homeowner? By obtaining a mortgage to fund the purchase. Here’s everything you need to know about the mortgage loan underwriting process.
What is Mortgage Underwriting?
Mortgage underwriting is the process through which your lender examines your home loan application and determines how risky it would be to lend you money. Your lender must assess your creditworthiness and the chance that you will be able to repay your loan before approving your application.
What does the underwriter want to see? Essentially, they want to determine whether or not lending you money is dangerous. This is determined by examining the three C’s: credit, capacity, and collateral.
What Is Involved in the Mortgage Underwriting Process?
The underwriting process examines your finances and previous credit decisions. During the underwriting process, your underwriter will consider four factors that will provide them with a more full picture of you:
#1. Income
Your underwriter must be satisfied that you have sufficient income to cover your monthly mortgage payments. You must present three forms of documentation to substantiate your income: W-2s from the previous two years, two most recent bank statements, and two most recent pay stubs
Are you self-employed or do you hold a significant stake in a company? In lieu of W-2s, you’ll need to provide profit and loss statements, K-1s, balance sheets, and your personal and business tax returns.
Your underwriter will also verify your job situation with your company and ensure that your income matches the income you declare.
#2. Appraisal
When buying a home, appraisals are nearly always required. They safeguard both you and your lender by ensuring that you only borrow what the house is genuinely worth.
An appraiser will assess the property and go around the house, taking pictures and measurements to get an idea of the condition and attributes of the home. The appraiser evaluates comparable properties by looking for residences with a similar location, size, and amenities. Unless you live in a rural region, these “comps” must have sold within the last 6 months and be within a mile of the property.
The underwriter analyzes the appraisal to the amount of your mortgage after a professional appraiser assigns a value to the property. If the home is valued far less than the mortgage, your application may be halted. In this case, you can challenge the appraisal, negotiate a lesser purchase price with the seller, or walk away from the property entirely.
#3. Credit
Your credit score is also evaluated by an underwriter. Your credit score, a three-digit number, assesses how responsible you are when it comes to debt repayment. A strong credit score demonstrates that you pay your bills on time and can help you qualify for a cheaper interest rate.
The minimal credit score you’ll need depends on the sort of loan you’re looking for. If you apply for a conventional loan, your credit score should be at least 620.
The minimum credit score required to apply for an FHA loan is 580. Although there is no fixed minimum credit score for VA loans, different lenders may have their own. Your underwriter will also obtain your credit report and examine your payment history, credit utilization, and account ages.
Your debt-to-income (DTI) ratio is determined by the underwriter based on your credit report. As previously stated, it is the entire amount of money you spend each month on bills and expenses divided by your monthly gross (pre-tax) income. Lenders desire a DTI ratio of 50 percent or less.
Here’s an example of DTI calculation: Assume you make $5,000 every month. Assume you pay $600 in rent each month, $200 on an auto loan, and $300 on student loan installments.
To calculate your DTI, divide $1,100 (the total cost of a month’s debts) by $5,000. In this case, your DTI is 0.22, or 22 percent.
#4. Asset Specifics
Because your assets might be auctioned for cash if you default on your payments, they can assist you with securing mortgage approval. Your checking and savings accounts, real estate, stocks, and personal items may be scrutinized by an underwriter.
Because closing fees can range from 3 to 6% of the loan amount, lenders utilize assets to guarantee you can make mortgage payments after you pay closing charges.
Steps For Mortgage Loan Underwriting Process
While underwriting standards differ from lender to lender, mortgage loan underwriting typically follows a series of processes. Here is an overview of the mortgage loan underwriting process.
Step #1 Apply for a mortgage.
Depending on the lender, you may be required to complete a mortgage application online, over the phone, or in person. When you apply for a mortgage, you authorize the lender to run your credit report and analyze your personal and financial information.
Step 2: Show verification of your income, assets, and debts.
In addition to completing a mortgage application, lenders may request documentation to verify the information on the application. This may involve…
- W-2s, 1099s, and pay stubs
- Copy of most recent tax returns
- Financial statements for any companies you own
- Any leasing agreements should be copied.
- Bank statements, as well as statements for investment and retirement accounts
You may be required to supply extra paperwork, such as a copy of your divorce or separation agreement, evidence of sale for your previous property, and more, depending on the lender’s criteria and your individual financial position.
Step 3: Appraisal Request
Typically, the lender will request an assessment from a state-licensed or certified appraiser. The appraisal’s objective is to confirm the property’s market worth and ensure that it may be used as collateral for the mortgage.
Step 4: Conduct a title search.
Lenders may also contract with a title company to do a title search. The title company analyzes public records to ensure that the seller has the legal right to sell the property and that there are no judgments, liens, unpaid taxes, or other title issues that would prevent the seller from transferring a clear title.
Step 5: Await the judgment of the underwriter.
When the underwriter receives all of the required information, they will compare it to their underwriting rules and decide whether or not to approve the loan. Depending on your financial status, the type of loan you’re applying for, and how long it takes to complete the appraisal and title search, the entire process can take anywhere from a few days to several weeks.
The time it takes to make a judgment is also affected by whether your application is eligible for automatic underwriting or must go through manual underwriting. Automated underwriting refers to the process through which a computer algorithm automatically approves (or rejects) people based on the lender’s preferred criteria.
If your application does not fit the lender’s preferred criteria, it may be submitted to manual underwriting. This implies that a human will analyze your financial details and determine whether you are eligible for a loan. Manual underwriting is often more time-consuming.
If you’re not approved — or if the amount is less than you expected — you’ll want to know why so you can improve your chances if you apply again later or with a different lender.
How Long Does the Mortgage Underwriting Take?
The mortgage loan underwriting process could take a few days or a few weeks. There is no set time frame for this stage of the mortgage process. The length of the underwriting process is determined by several factors, including:
- Your financial status: If your financial situation is complicated, with several income sources, assets, and obligations, the process may take longer because the underwriter must check each component of your financial picture.
- Your loan type: Some mortgage kinds may have more stringent restrictions, which might make the process take longer. FHA, USDA, and VA loans, for example, may have more complicated rules.
- The completeness of your application: The process takes longer each time the underwriter requests an extra document from you. If you submit your application completely, the underwriter will be able to work more swiftly. Delays in the title search, title insurance, or appraisal process can all cause underwriting to take longer.
- The status of the housing market: Applying for a mortgage during the peak season for home buying can cause the underwriting process to take longer. Your underwriter may have numerous applications to process at the same time, which may lengthen your wait.
Tips for an Easy Mortgage Loans Underwriting Process
#1. Organize your documents.
Having all of your financial records prepared before applying for a loan is the easiest way to keep the mortgage loans underwriting process on track. If you need to seek papers from a particular institution, do it as soon as possible. It’s a good idea to compile a file that includes the following:
- Employment history from the last two years (including company documents and tax filings if self-employed)
- W-2s from the previous two years
- Pay stubs from at least 30 to 60 days before applying
- Checking, savings, money market, CD, and retirement account information
- Additional income sources include alimony or child support, annuities, bonuses or commissions, dividends, interest, overtime pay, pensions, or Social Security benefits.
Furthermore, if you intend to utilize gifted cash for a down payment, you must have those assets in your possession (that is, in an account in your name) well before you apply. You’ll also need a gift letter to prove that the money is a gift. Both can help you avoid unneeded setbacks in your underwriting.
One thing to keep in mind is that you should only supply the documentation that the lender requests. If you offer extra documentation, the process may be slowed.
#2. Get your credit in order.
A lower credit score might make being approved for a mortgage more difficult, as well as make your loan more expensive with a higher interest rate.
If you want to increase your credit score, make a commitment to pay down debt. This will improve your credit score and lower your DTI ratio (many lenders prefer 36 percent or less). This increases your application’s chances by a factor of two.
Check your credit report as well, to guarantee there are no inaccuracies that could harm your score. AnnualCreditReport.com allows you to obtain a copy from each of the three main credit bureaus. If you discover an error, contact the agency as soon as possible to contest it.
#3. Put down a greater deposit
A higher LTV ratio means the lender stands to lose a lot more money if you default on the mortgage. You can minimize your LTV by making a higher initial down payment.
If you placed 10% down on a $200,000 home, you’d have to take out a $180,000 loan, placing your LTV ratio at 90%. If you put down 20% on the same house, you’d only need a $160,000 mortgage and your LTV ratio would be 80%. This reduces the lender’s overall risk, making you a more appealing prospect for a loan.
You might attempt to save more for a down payment or, if possible, ask family or friends for assistance. There are also numerous down payment assistance programs available, such as deferred payment loans and grants, and your lender may provide additional aid. If you satisfy specific conditions, Chase Bank, for example, will contribute up to $3,000 toward your down payment.
How Does the Underwriting Process Work?
The process of determining the level of risk you provide to a potential insurer is known as underwriting. Professional underwriters examine your application’s requirements to determine whether it is possible to offer you a policy and, if so, what level of coverage you qualify for. Using the data, they then determine your monthly premium.
How Long Does It Take the Underwriter to Decide?
It can take as little as two to three days to complete the underwriting process, which mortgage lenders use to verify your assets, check your credit, and examine your tax records before approving a home loan. However, a loan officer or lender typically needs more than a week to finish the procedure.
How Does a Loan Get Approved by an Underwriter?
The underwriter will look over your credit report to determine how successfully you handled payments on or paid off credit cards, loans for students, and other types of credit. They search for cues that will enable them to anticipate your capacity to repay loans.
How Do You Find Out Whether Underwriting Has Been Accepted?
You will receive a commitment letter if a loan request satisfies the underwriting requirements and has been examined and authorized by an underwriter. Your loan program, loan amount, loan period, and interest rate will all be mentioned in the letter. However, it too might have prerequisites that must be satisfied before shutting down.
Final Thoughts
Underwriting simply means that your lender verifies your income, assets, debt, and property information before finalizing your loan.
An underwriter is a financial specialist who examines your finances and determines how much risk a lender will take on if you get loan approval. Underwriters precisely assess your credit history, assets, the quantity of the loan you want, and how well they predict you will be able to repay the loan. As part of this risk evaluation, they will also verify your income and employment information, as well as your DTI.
It’s a good idea to aggressively reply to your lender’s requests during the underwriting process. During underwriting, avoid applying for new credit lines and answer inquiries as soon as feasible. If you are not upfront and honest about your finances, the loan application process will take a longer time.
Mortgage Underwriting FAQs
How long do underwriters take to approve a mortgage?
Mortgage underwriting can take a day or two, or it can take weeks, depending on these criteria. In most cases, initial underwriting approval occurs within 72 hours of submitting your full loan file. In extreme cases, this process could take up to a month.
What should you not do during underwriting?
- During the loan process, do not resign from your existing employment or retire.
- Prior to the closure of your new mortgage loan, do not open or apply for any new credit accounts.
- Balance transfers on existing credit card balances are not permitted.
Should I be worried about underwriting?
If you become prequalified, there’s no need to fret or stress about the underwriting process – just stay in touch with your lender and don’t make any substantial changes that will have a negative impact.
How often do mortgages get denied in underwriting?
One out of every ten mortgage loan applications is denied by mortgage underwriters. This is frequently due to the applicant’s excessive debt, a shaky employment history, or a low appraisal report. However, by understanding what an underwriter looks for, you can make your application as appealing as possible.
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