You\u2019ve 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\u2019s everything you need to know about the mortgage loan underwriting process.<\/p>\n
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.<\/p>\n
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\u2019s: credit, capacity, and collateral.<\/p>\n
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:<\/p>\n
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<\/p>\n
Are you self-employed or do you hold a significant stake in a company? In lieu of W-2s, you\u2019ll need to provide profit and loss statements, K-1s, balance sheets, and your personal and business tax returns.<\/p>\n
Your underwriter will also verify your job situation with your company and ensure that your income matches the income you declare.<\/p>\n
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.<\/p>\n
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 \u201ccomps\u201d must have sold within the last 6 months and be within a mile of the property.<\/p>\n
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.<\/p>\n
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.<\/p>\n
The minimal credit score you\u2019ll need depends on the sort of loan you\u2019re looking for. If you apply for a conventional loan, your credit score should be at least 620.<\/p>\n
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.<\/p>\n
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.<\/p>\n
Here\u2019s 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.<\/p>\n
To calculate your DTI, divide $1,100 (the total cost of a month\u2019s debts) by $5,000. In this case, your DTI is 0.22, or 22 percent.<\/p>\n
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.<\/p>\n
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.<\/p>\n
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.<\/p>\n
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.<\/p>\n
In addition to completing a mortgage application, lenders may request documentation to verify the information on the application. This may involve\u2026<\/p>\n
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\u2019s criteria and your individual financial position.<\/p>\n
Typically, the lender will request an assessment from a state-licensed or certified appraiser. The appraisal\u2019s objective is to confirm the property\u2019s market worth and ensure that it may be used as collateral for the mortgage.<\/p>\n
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.<\/p>\n
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\u2019re 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.<\/p>\n
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\u2019s preferred criteria.<\/p>\n
If your application does not fit the lender\u2019s 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.<\/p>\n
If you\u2019re not approved \u2014 or if the amount is less than you expected \u2014 you\u2019ll want to know why so you can improve your chances if you apply again later or with a different lender.<\/p>\n
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:<\/p>\n
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\u2019s a good idea to compile a file that includes the following:<\/p>\n
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\u2019ll also need a gift letter to prove that the money is a gift. Both can help you avoid unneeded setbacks in your underwriting.<\/p>\n
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.<\/p>\n
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.<\/p>\n
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\u2019s chances by a factor of two.<\/p>\n