Loan underwriting may sound arcane, but chances are, you’ve already experienced a similar (albeit simpler) process for your pre-approval letter. While pre-approval makes you competitive against sellers, it is not an official guarantee from your lender. Underwriting makes it official. This is the last step for your lender before closing the property.
Because underwriting is typically a hands-off part of loan approval, many home buyers and property investors have no idea what to expect from this financial process. There are steps you can take to make it run as smoothly as possible because it’s important to know what’s happening behind the scenes.
What is underwriting?
Mortgage underwriting is the process during which your lender (whether a bank, broker or credit union) determines whether you qualify for the mortgage that will purchase your property. Because you are asking to borrow such a large amount, the lender is not going to hand it over without a thorough check of your financial background. A team of people working for your lender (underwriter) will look into your finances and potential assets. From there, they will make a decision on loan disbursement.
What does an underwriter do?
After you go under contract, an underwriter will verify your income, credit and assets. It’s all based on the documents you submit as they request—and, yes, you’ll need to resubmit what you already gave them during the pre-approval process. They will then conduct an appraisal and title search as well as appraise the property.
After collecting all the information required, they will determine your loan risk and either approve or reject that huge home loan.
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What is involved in the underwriting process?
There are many steps in the underwriting process, which is why it seems to take so long! Here’s what to expect.
financial Review
You, the borrower, will need to submit some basic documents like recent pay stubs, tax returns and account statements to your lender. From here, they’ll make sure you have the income to support your monthly mortgage payment as well as some leftover money for the down payment, closing costs, and any worst-case-scenario maintenance or costs.
If you have a derogatory mark on your credit history, you may need to submit a statement explaining why. Submit your investment asset details such as stocks, bonds, retirement accounts, or other real estate to show your high net worth and financial health.
Evaluation
An appraisal is based on the selling price of similar properties in your area. This helps your lender understand the objective value of your new home. Once all the proper documents are received, your lender will order an appraisal, which will ensure that the property is worth (or more) the amount you are paying as collateral in case the property itself defaults on the loan. functions as
Typically, the lender will order an appraisal, and you (the buyer) are involved only when the appraisal report arrives. The cost of the appraisal is often packaged into your lender fee, so you don’t need to take any action to choose, rent. , or pay an appraiser. In fact, an appraisal is required to be an “arm’s length” transaction, meaning that neither you nor the lender can “choose” the appraiser.
title search
“Title” specifies who has the right to the property. During underwriting, your lender wants to make sure that they (and you) are protected from any defects in title that give another party a claim to the property. It could also be another mortgage, a lien, an easement, or a missing heir.
Typically, your lender will appoint a title company to conduct this final title search. And they will purchase title insurance to cover their interest in the property. You (and/or the seller, depending on your contract) should also purchase title insurance to protect yourself against any of these rare title problems.
insurer’s decision
After all is said and done, there are four possible outcomes: approved, denied, suspended or approved with conditions.
- Permission: It’s straightforward. You have been approved, and no further action is required. Congratulations!
- Refuse: It is very rare that you will be denied this late in the process unless your financial situation has changed since you applied for pre-approval. If this is the case, find out why you were denied so you can take the necessary steps to work toward approval. This may involve a larger down payment or changing the type of loan you are taking out.
- suspension: There was a hole in your application, such as an inability to verify your employment. Usually, you can reactivate the application by providing any missing information.
- conditional approval: Your financial information has been approved, but more documentation is needed to consider you fully qualified. This includes waiting on proof of insurance coverage, an appraisal, or a clear title report.
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What does the underwriter see?
An underwriter takes a comprehensive look at your finances. This also includes:
- employment and salary information: Determines your ability to repay the loan.
- Bank account statement: Determines whether you have the money for a down payment and closing costs — plus some reserve after purchase.
- credit score and historyThis includes scores as well as late payments, foreclosures, and bankruptcy.
- debt-to-income ratio (DTI): Represents the amount of your income that goes towards paying off the loan. It is calculated taking into account your total monthly expenses. This includes the new mortgage being divided by your gross monthly income, along with PITI (principal, interest, taxes, insurance) and any applicable mortgage insurance premium costs.
- loan-to-value ratio (LTV): It takes into account the appraisal, mortgage amount and down payment. This is calculated by dividing the mortgage principal by the appraised property value, so a higher down payment will improve this percentage.
How long does underwriting take?
As with any part of the home buying process, it varies depending on your personal financial situation. You must do your part. This means handing over all the required documents to your lender as soon as possible. A 30-45 day window is typical for the underwriting process, although a decision can be made within weeks.
Your offer contract should state a deadline by which you must apply for the loan, so make sure you are working with your lender before this deadline expires to avoid breach of contract.
Underwriting Mistakes to Avoid
The underwriting process is complex – and also delicate. Buyers should not do this while the underwriter is working.
- Ignore the Lender’s Email, You should be immediately available to fulfill any requests or send any documents to make the process go as quickly and smoothly as possible. Be sure to check your email at least once a day after going under contract on a house.
- offer to buy at an unfair price, It is the exception and not the rule when a rating falls short. If an appraisal comes back less than your loan amount, chances are you (and your agent) submitted an offer higher than the property is worth. To avoid problems with appraisals, make sure you’re looking at comparable properties in the same area that have sold within the past 90 days to determine an accurate offer price.
- Ignore Your Credit Limits, Some types of loans, such as FHA and VA loans, require the property to be in livable condition. This includes, but is not limited to, adequate heating, roofing, electricity, appliances, a safe and usable kitchen, and at least one usable bathroom. Keep this in mind when offering properties to avoid underwriting skirmishes down the road.
- lying to your lender, Underwriting is basically the process of fact-checking all the statements made by you in your loan applications. If you’ve fudged some facts about your income or savings, it will come back to bite you in this final step. You should explain everything about your financial history from the start so that if a denial is on the horizon, you can get it out of the way as quickly as possible (rather than after you’ve already committed to a home and are stuck at an inspection). have spent the money).
- Financial Monkey business between “under contract” and “closing time”,, As soon as you are under contract on a property, treat your finances like a temple to avoid red flags during the underwriting process. Don’t make a big purchase, open a new line of credit, buy a new car, change jobs, or miss any payments. In fact, the entire time you’re looking for a home and going through the loan process, you should try to spend as little as possible. (Then you can save extra money for unexpected expenses during the transaction.)
Underwriting is the final step for your lender in which they verify all of your information and decide whether or not to officially extend the loan. After going under contract on a property, your lender will verify your income, credit and assets as well as order an appraisal and title check of the property.
In addition to just being cooperative and honest throughout the entire loan process, make sure you’re offering at the right price and on the right property to avoid problems with approval. Similarly, take care of your finances well and avoid large transactions during the entire home buying process to ensure a smooth underwriting process. After underwriting, you’re off to closing – and on your way to homeownership!
Note by BiggerPockets: These are the views expressed by the author and do not necessarily represent the views of BigPockets.
