What Does It Mean When a Loan Goes To Underwriting?
Do you have any idea of what entails the underwriting process? Did you know that your finances go through a process called underwriting before you can officially be approved for a mortgage? We all know how tough it is to get approved for a loan, and one of the most important and daunting parts of the lending process is when it comes to underwriting. The underwriting process is a crucial part of the home loan process since you’re not allowed to close on your home without the lender completing the underwriting process for your mortgage. Let’s have a closer look at the underwriting process.
The underwriting process generally leads to a decision that determines whether or not a loan will be approved. It is during this stage when your lender evaluates the situation at hand and is left to determine if you qualify for the loan. Several factors are used by the lender to get a final decision on a mortgage loan. Each of these factors is carefully analyzed during the underwriting process with the use of specialized software programs.
Here is a summary of how the underwriting process goes:
- Mortgage underwriters get to examine your application and documents to either approve or decline your request.
- Computers are capable of approving mortgages, but human underwriters are always there to verify whether or not your documents are in line with the information provided on your application.
- A proof of your income and assets is always requested by underwriters and they may have further requests along the line.
How long does the underwriting process take?
Everyone has a distinct mortgage situation, your financial situation has a vital role to play on how your mortgage will look like. This to say the time frame taken by the underwriting process will vary as a case-by-case study basis. The sooner every relevant document is handed to the underwriter, the smoother and less lengthy the process will be. It’s always advisable to get all the requested documents to the lender as per the requested time frame.
What Exactly Is The Job Of An Underwriter?
Every home on the market undergoes a process called appraisal, where a financial expert known as an underwriter is brought to study the finances and assess how much of risk can be involved for a lender if they decide to grant a loan to the buyer. The underwriter has the job to help a lender decide whether or not the buyer will get a loan approval or not and will further work with you to help you submit all necessary paperwork on time.
Basically, the underwriter’s job is to make sure you don’t go in for a mortgage you can’t afford.
- Credit history check: An underwriter would look at your credit score and create a credit report from it. With the help of your overall credit score, they search for things like late payment, bankruptcies, overuse of credit and others.
- Call for an Appraisal: An underwriter will hire an appraisal to determine if the amount the lender offers for the property actually matches the real price of the home.
- A Check on your Income and Employment: As a buyer, before you get approved for a mortgage, you’ll be asked by an underwriter to prove your current income and employment situation.
- Check out your Debt-to-Income Ratio (DTI): This study will help tell lenders how much money you spend versus how much income you make. The DTI can be calculated by simply summing up your monthly minimum debt payments and dividing it by your monthly pretax income. Your debts are examined by an underwriter and compare them to your income to be sure you end up with more than enough cash flow to handle your monthly mortgage payments, taxes, and insurance.
- Study your Down Payments and Savings: The underwriter also has the job to study your savings account to make sure you are left with enough savings to carry on your income or to use as a down payment at closing.
What Makes Up The Underwriting Process?
- Application: Starting by filing a formal application for the loan is the first step in the underwriting process. This generally has to deal with complete evidence of current income and assets. Combined with estimates of existing debt obligations and your most recent credit score. What next? The property value is then evaluated and determined by an appraiser and a title search done to ensure no liens holding the property. After this has been determined, it’s now time to move the loan to the underwriting process.
- Credit Review: Your credit score and history plays a vital role when it comes to determining whether or not you’ll be approved for a mortgage or not. Most lenders go for automated computer-based underwriting programs with the ability to make decisions on personal loans. Key credit data such as loans, mortgages, credit cards and bank overdraft records against those disclosed by you in your application. With underwriting, the complete credit report is analyzed. Including the type of credit you possess, the way you use it and any red flags are considered. The higher your credit score, the more chances you’re to be approved for a mortgage. Lender differs from each other, but some happen to be more lenient than others when it comes to dealing with late payments over the period of your credit history.
- Income to Debt Ratio: During the underwriting process, the underwriter gets to use financial ratios to help make the lending decision. The underwriter will study your income with respect to the amount of debt you have. This is known as the debt-to-income ratio, and this isn’t allowed to exceed a certain amount if you want to qualify for a mortgage. The underwriter also has to look at the loan-to-value-ratio. This is a ratio that looks at the value of a house to the total amount that is being lent.
- Income and Employment Verification: Underwriters are required to verify your employment to make sure you have a stable income. They may go as far as calling your employer to enquire if you actually work there and will review your last two years’ W-2s or tax returns. This is generally enough proof if you have a typical job, receiving biweekly or weekly payment. In case you have an unconventional job with varying income or you work on commission, other forms of verification may be needed for you to get approved. Accepted documents may include tax returns, bank statements, and accounting records if you are self-employed. The underwriting system also takes into consideration your income debts, calculating what’s called a debt-to-income ratio or DTI.
- Approval Decision: Once every necessary information has been successfully reviewed by the underwriter, they’re now left to make a final decision on the loan. At this point, there are a few possible options. Either the loan is automatically approved or the lender might determine that some conditions must be met before the application can be approved. For example, you might be required to provide additional verification of income or include the sale of your current property. This might possibly be declined if the client failed to fulfill underwriting requirements. The lender will always send an explanation in case you were denied a mortgage loan.
Throughout the underwriting process, it is advisable to always provide prompt response to every request of your lender. Doing so will greatly improve your chances of being approved and will move the underwriting process along smoothly and in a timely manner. If you are so determined to complete the underwriting process fast and be approved for your loan, it is best for you to maintain a financial stability status. A few tips are listed below on how to go about that:
- Never try to do something that might lead to decreasing your credit score. A most common in this case is trying to apply for new credit lines during underwriting.
- Respond to inquiries as fast as possible and be upfront and honest about your finances.
- Have a steady job during this period. It is important to demonstrate employment stability.
- Save as much money as you can. You need enough cash to handle the closing costs, and payments and other expenses during the home purchase.
- Keep with up with monthly payment and always be on time. Pay off any debts and do not do anything that may lead to increasing your debts.
- Do not deducts funds from your savings account during the underwriting process.
The easiest way to avoid errors during the underwriting process is to disclose all your financial history to your lender before your initial loan preapproval. Always let the lender go through your credit history after reviewing it yourself, you need to be sure it’s error free. File your tax returns, pay bills on time and do not spend savings or add your debt load within the underwriting timeframe.
The underwriting process isn’t a bad idea, it’s just a method lenders use to ensure their money doesn’t get into the wrong hands.
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About The Author
Geoff Southworth is the creator of RealEstateInfoGuide.com, the site that helps new homeowners, investors, and homeowners-to-be successfully navigate the complex world of property ownership. Geoff is a real estate investor of 8 years has had experience as a manager of a debt-free, private real estate equity fund, as well as a Registered Nurse in Emergency Trauma and Cardiac Cath Lab Care. As a result, he has developed a unique “people first, business second” approach to real estate.
This article has been reviewed by our editorial board and has been approved for publication in accordance with our editorial policy.