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If you’re like most people who purchase a home, you’ll obtain financing through a mortgage.
Underwriting is the process used by mortgage lenders to evaluate your creditworthiness and decide whether to approve you for that loan. What you should know about the mortgage underwriting procedure is provided below.
What is mortgage underwriting?
A mortgage lender will evaluate the risk of lending you money through a process called underwriting. Before deciding whether to approve your mortgage application, the bank, credit union, or lender must determine whether you are likely to be able to repay the home loan. This is done through underwriting.
A loan officer or mortgage broker gathers the numerous documents required for your application prior to underwriting. Then, an underwriter verifies your identity, examines your credit history, and evaluates your financial situation, taking into account your income, cash on hand, investments, financial assets, and other risk factors.
Many lenders adhere closely to the Freddie Mac and Fannie Mae underwriting standards.
What does a mortgage underwriter do?
Assessing delinquency risk, or the general risk that you won’t be able to repay the mortgage, is the responsibility of a mortgage underwriter. In order to do so, the underwriter assesses various elements that aid the lender in understanding your financial situation, such as:
The underwriter then records their evaluations and considers all the factors in your loan application to determine whether the risk level is acceptable.
Here’s an example from Fannie Mae’s underwriting guidelines. Assume the lender typically needs the following for a single-family home that will be used as a primary residence:
In the event that a borrower falls short in one area, the loan may still be approved based on the strength of the other two factors and/or other factors, such as:
As a result, if your DTI was higher—let’s say it was 40%—you might still be approved for a mortgage if your credit score was higher. You might be able to obtain mortgage approval even with a lower credit score, like 620, if your LTV ratio was less than 97 percent.
The mortgage underwriting process in 5 steps
Underwriting can be a long process. Although each lender has slightly different procedures and methods, the following five steps constitute the underwriting process:
Get preapproved for a mortgage as your very first step, even before you start looking for a home. A lender will examine your financial details, including your income and debts, and carry out a credit check to determine whether you are preapproved.
Remember that obtaining prequalification and obtaining preapproval are two distinct things. If your financial situation doesn’t change, a preapproval from a lender typically means you’ll be approved for a certain amount of financing.
Simply put, a prequalification is a sign that you might be approved for a loan. When compared to a prequalification, getting a preapproval typically requires you to provide the lender with more information.
Income and asset verification
Be ready to provide additional financial documentation, such as tax returns and bank account statements, and to have your income verified. Money in your bank accounts, retirement funds, investment accounts, the cash value of your life insurance policies, and ownership stakes in businesses where you have assets in the form of stock or retirement accounts are all assets that will be taken into consideration.
If you are approved, your lender will send you a preapproval letter outlining its willingness to lend you money up to a specific amount based on the data you provided. A preapproval letter informs the seller that you are a serious buyer and have the funds to support a purchase offer.
To determine how much you need, use Bankrate’s mortgage calculator.
A lender will conduct a property appraisal once you have found a home that you like and that is within your price range. This is to determine whether your offer is reasonable given the condition of the house and similar nearby properties. Depending on the complexity and size of the home, an appraisal for a single-family home can cost anywhere between a few hundred and over a thousand dollars.
Title search and title insurance
A lender won’t provide financing for a home that has pending legal actions against it. To ensure that the property can be transferred, a title company conducts a title search in this situation.
The title company will investigate the property’s past, looking for liens, easements, zoning laws, pending lawsuits, unpaid taxes, and restrictive covenants. The title insurer then issues a policy of insurance that ensures the veracity of its investigation. Two policies may be issued in some circumstances: one to protect the lender (almost always required) and one to protect the property owner (optional, but sometimes advantageous).
The ideal result is that your mortgage application is approved after the underwriter thoroughly reviews it. That clears the way for you to proceed with the property closing.
However, you might receive one of these decisions instead:
Your home purchase will be almost finished once all conditions are met and your mortgage is approved. Closing day is the last step, when the lender funds your loan and pays the seller in exchange for the property title. At this point, you’ll sign the last pieces of paper, pay any closing costs that are owed, and get the keys to your new house.
How long does mortgage underwriting take?
Depending on whether the underwriter requires additional information from you, how busy the lender is, and how streamlined the lender’s procedures are, the mortgage underwriting process can take a few days to a few weeks.
The process will go more smoothly and quickly if you gather your documents and respond to the lender’s requests for information as soon as possible.
But keep in mind that the overall lending process includes more than just underwriting. You should anticipate a loan to fully close in 40–50 days.
Automated underwriting vs. manual underwriting
To decide whether to approve you for a loan, a mortgage underwriter can review your loan application manually or automatically using a program called automated underwriting.
Generally speaking, automated underwriting is faster than manual underwriting, but since a computer is doing the evaluating, it has some restrictions that might not be ideal for borrowers with special circumstances, such as inconsistent income.
In these circumstances, manual underwriting may make it simpler to qualify a borrower than using an automated system.
Additionally, lenders occasionally combine automated and manual underwriting to determine risk.
How strict is mortgage underwriting?
In 2020, 9. Data from the Home Mortgage Disclosure Act shows that 3 percent of loan applications for home purchases were turned down.
Mortgage lenders typically adhere to certain standards for the loans they originate.
Lenders follow Fannie Mae and Freddie Mac standards for conventional loans because if a loan satisfies those standards, the lender can sell it on the secondary market and use the proceeds to create more mortgages for more borrowers.
Lenders must adhere to the regulations of the Federal Housing Administration, Department of Veterans Affairs, and Department of Agriculture for an FHA, VA, or USDA loan because those agencies guarantee or insure those loan types in the event of borrower default.
Additionally, lenders must consider their business of issuing mortgages; they cannot assume more risk than their venture can bear. As a result, lenders may impose “overlays” in addition to the baseline loan standards. ”.
Sometimes, lenders implement stricter protocols in response to economic volatility. For instance, many lenders started demanding higher credit scores and larger down payments throughout the pandemic.
Nevertheless, some lenders can be accommodating, allowing a borrower to be approved based on assets rather than income.
Tips for a smooth mortgage underwriting process
Organizing your financial records before you apply for a loan is the best way to keep the mortgage underwriting procedure on schedule. For instance, request any necessary paperwork from a particular institution as soon as you can. It can be a good idea to compile a file that contains the following information:
Additionally, it’s crucial to have gifted funds in your possession (i.e., in an account in your name) well before you apply if you intend to use them as a down payment. To prove that the money is truly a gift, you’ll also need a gift letter. Doing both can help you avoid unnecessary setbacks in underwriting.
One thing to keep in mind is that you should only submit the paperwork that the lender requests. Additional paperwork may slow down the process if you submit it.
Get your credit in shape
You may find it more challenging to be approved for a mortgage if your credit score is low. It can also increase the cost of your loan due to a higher interest rate.
If you want to raise your credit score, resolve to reduce your debt. This will improve your credit score and lower your DTI ratio, which many lenders prefer to be at or below 36%. That gives your application’s chances a double boost.
In addition, check your credit report to ensure there are no errors that could negatively impact your score. You can get a copy from the three major credit bureaus at AnnualCreditReport.com. If you do find a mistake, contact the agency to dispute it as soon as possible.
Make a larger down payment
If you default on the mortgage, the lender stands to lose a lot more money if the LTV ratio is higher. Making an earlier, larger down payment will lower your LTV.
For instance, if you put down 10% on a $200,000 home, you’d need to borrow $180,000, making your LTV ratio 90%. If you put 20% down on the same house, your LTV ratio would be 80% and you would only need a $160,000 mortgage. Because of the reduced risk to the lender as a whole, you become a more desirable borrower.
If possible, you can ask family or friends for assistance or work to save more money for a down payment. Deferred payment loans and grants are just a few of the numerous down payment assistance programs that can be helpful. Additionally, your lender may provide their own assistance. For instance, Chase Bank will contribute up to $2,500 to $5,000 toward your down payment if you meet certain requirements.
Getting started with the mortgage underwriting process
You are prepared to begin comparing loan offers if you are looking to obtain a mortgage and all of your paperwork is in order. Find the loan with the most advantageous terms and the lowest interest rate and fees possible.
When shopping around, take into account what kind of loan will work best for you — some mortgages, for instance, are better for lower-income borrowers or those with worse credit — as well as how long you plan to stay in the house and what you can afford.
FAQ
What does an underwriter look at for a mortgage?
The underwriter looks at both your credit history and your FICO credit score. Your credit history is reviewed by the underwriter, who checks whether payments have been made on time. Your credit score is influenced by a number of variables, such as your payment history, credit usage, and any adverse circumstances, such as bankruptcies.
How long does it take for the underwriter to make a decision?
It can take as little as two to three days to complete the underwriting process, which is required by mortgage lenders before they can approve a loan for a home. However, a loan officer or lender typically needs more than a week to complete the procedure.
What are red flags for underwriters?
Verifications of general red flags that are finished on the same day as the order or on a weekend or holiday homeowner’s insurance is a rental policy. different mailing addresses on bank statements, pay stubs and W-2s. assets are not consistent with the income.
How often do underwriters deny loans?
How frequently do underwriters reject loan applications?, you might be wondering. com, 8% of mortgage applications are turned down, though the percentages vary depending on the location and type of loan. For instance, FHA loans have distinct criteria that may make applying for the loan simpler than with other loan types.