What Is The Mortgage Underwriting Process?

What is mortgage underwriting?

Mortgage underwriting is the process a lender uses to decide whether to approve your mortgage application.

Prior to underwriting, your loan officer or mortgage broker will collect credit and financial information for your application. A mortgage underwriter working for a lender will verify your identity, check your credit history, and evaluate your financial situation, including your income, cash reserves, investments, and debt.

Many lenders strictly adhere to the underwriting guidelines issued by Fannie Mae and Freddie Mac, the government-sponsored organizations that guarantee and purchase mortgages in the secondary mortgage market.

What does a mortgage underwriter do?

A mortgage underwriter’s primary job is to measure how much risk a lender is assuming when approving a loan. We do this by evaluating your financial situation and your chances of repaying your loan on time.

The mortgage underwriter will:

• Look at your credit history. This includes looking at your credit report, credit score, and payment record.
• Check your finances. Lenders use certain guidelines as the basis for lending. For example, Fannie Mae’s conventional lending guidelines for fixed-rate mortgages require borrowers to have a loan-to-value (LTV) ratio of up to 97 percent (meaning a down payment of at least 3 percent) and a minimum credit score of 620. score, and a debt-to-income (DTI) ratio of up to 36%. Lenders may modify these guidelines or supplement them with their own criteria. You can also find out more about your financial situation. For example, financial reserves (investments, assets, savings) may be taken into account. If the loan is against an income property, the lender will also assess whether you will occupy the property with a tenant.
• Request a real estate appraisal. Loan approval largely depends on the amount you are seeking to borrow and the value of the home you are purchasing. The insurance company will request an appraisal of the home to ensure that the price you plan to pay matches the determined value.
• Please make a decision. Once all reports and documents are in place, the mortgage underwriter will approve or deny your application.

How long does it take to underwrite a mortgage?

The mortgage underwriting process can take anywhere from a few days to a few weeks. The schedule will vary depending on whether the underwriter needs more information from you, how busy the lender is, and how streamlined the lender’s operations are.

Another factor is whether the underwriter uses a manual or automated underwriting process. Automated underwriting is usually faster than manual underwriting, but because the evaluation is done by a computer, there are some limitations and it may not be suitable for borrowers with special circumstances, such as unstable income.

In these cases, it may be easier to determine a borrower’s eligibility through manual underwriting rather than an automated system. In some cases, lenders may use a combination of automated and manual underwriting to assess risk.

Underwriting is one of the most time-consuming parts of the home loan process and one of the reasons closing takes so long. The faster you prepare your documents and respond to your lender’s requests for information, the smoother and faster the underwriting process will be.

However, keep in mind that underwriting is only one part of the entire lending process. Home purchase transactions are expected to close within 40 to 50 days.

Steps in the mortgage underwriting process

1. Pre-approval

Mortgage pre-approval is a thorough vetting process that shows you what interest rate a lender is likely to loan you at. Pre-approval is not a guaranteed loan offer, but rather an indication of your potential borrowing ability. Pre-approval is often required before you can make an offer on a home.

2. Proof of income, assets, and employment

The next step in the underwriting process is to verify your income, assets, and employment. This step means that the lender’s mortgage underwriter will check your credit and financial situation to see if you can repay the loan, while also checking your employment. You will need to provide documentation such as a W-2, pay stub, or bank statement for verification. If you are self-employed, you may need to submit additional documents such as tax returns and income statements.

3. Property valuation

Appraisal is the evaluation of the value of real estate by a qualified appraiser. This is done to ensure that the amount you borrow matches the value of the home you are purchasing. If the home is worth less than the mortgage amount, you can try to negotiate the price with the seller, but you’ll likely have to pay the additional amount yourself. In some cases, you may need to walk away from the deal and start the mortgage application and underwriting process again with a new loan or a different lender.

4. Title search and title insurance

Lenders don’t want to lend money to a home that has a legal claim. Therefore, a title company will perform a title search to determine whether ownership of the property can legally be transferred to you.

Title companies investigate the history of a property and look for liens, bonds, liens, easements, easements, zoning ordinances, pending lawsuits, unpaid taxes, and restrictive covenants. If you’re having trouble searching for titles, you have several options. You can either see if the seller will fix the problem by the closing date, ask for compensation from the seller to fix the problem, or you can walk away from buying the home.

The title insurance company will then issue a policy guaranteeing the accuracy of the survey. In some cases, two policies may be issued. One to protect the lender (which is required in most cases) and the other to protect the property owner (which is optional, but may be worth obtaining).

5. Decision

Once the mortgage underwriter is satisfied with your application, appraisal, and title search, your loan is considered clear to close. At that point, you can move forward with closing on the property.

If things don’t go smoothly, one of the following decisions may be made instead:

• Rejected: If your mortgage application is rejected, find out why the lender rejected it before taking the next step. For example, if a lender determines you have too much debt, you may be able to lower your DTI ratio by paying off your credit card balance and then reapplying.
• Paused: This may mean that the file is missing documentation. For example, if the insurance company cannot verify your employment or income, your application may be suspended. Your lender will let you know if they can reopen your application by providing more information.
• conditional approval: This means your loan has been approved, excluding any outstanding conditions such as your homeowner’s insurance policy. Once you provide proof of what is missing, you will need to cancel the contract.

Once you meet the conditions and are approved for a mortgage, your home purchase is almost complete. The final step takes place on closing day, when the lender hands over the money to you and you pay the seller. Sign the final documents, pay closing costs, and receive the deed and keys to your new home.

Tips for smoothing the mortgage underwriting process

The mortgage underwriting process can be complex and time-consuming, but there are things you can do to make it go more smoothly. To help the underwriting process go smoothly, take the following steps for at least the first two months before applying.

1. Build trust

A low credit score can make it harder to get approved for a mortgage, leading to higher interest rates and more expensive loans.

Try to improve your creditworthiness in the following ways.

• repay existing debt
• Avoid applying for new loans
• Improve your debt to income ratio (aim for 36% or less)
• Check your credit report and dispute any errors

2. Save up a large down payment

Mortgage underwriters also consider a mortgage’s LTV ratio (the amount borrowed, also known as the loan principal, divided by the value of the property). A high LTV ratio means your lender could lose a lot of money if you default on your mortgage.

You can lower your LTV ratio by paying more upfront. The larger the down payment, the easier it is to qualify.

Don’t be afraid to ask family or friends to help with the down payment, either as a full gift or as a personal loan. You can also look for down payment assistance programs for which you may be eligible. Ways to save money include opening a high-yield savings account or automating the transfer of a portion of your income into a savings account. You can also consider borrowing from your 401(k) or withdrawing money from your IRA. There are special rules when using the funds to purchase a home.

3. Organize your documents

The best way to keep the mortgage underwriting process on track is to have all your financial documents in order before you apply for a loan.

Please have the following items ready when applying.

• Employment information for the past two years (if self-employed, this includes business records and tax returns)
• W-2 for the past two years
• Please submit your pay slip from 30 to 60 days before the application date.
• Account information including checking, savings, money market, CDs, investment accounts, retirement accounts, etc.
• Additional income information, such as alimony or child support, pensions, bonuses or commissions, dividends, interest, overtime pay, pensions or social security payments.
• Gift letter if you received funds from a friend or relative as a down payment

4. Be honest about your financial situation

Mortgage underwriters will take a close look at your credit report and financial history, so don’t lie on your application. If you get a negative mark on your credit report, such as a missed payment, contact your lender and explain what happened. Lenders may be more forgiving of late payments if you address the extenuating circumstances and later make your payments in time.

Mortgage Underwriting Frequently Asked Questions

Additional reporting by Kacie Goff