Underwriting a loan may sound strange, but you’re probably experiencing a similar (albeit simpler) process for pre-approvals. Pre-approval makes you more competitive with the seller, but it is not an official guarantee from the lender. Underwriting makes it official. It’s the last step for your lender before you close the property.
Underwriting is usually the handing-over part of loan approval, so many homebuyers and real estate investors don’t know what to expect from this financial process. It’s important to know what’s happening behind the scenes, so there are steps you can take to make this as smooth as possible.
What is underwriting?
Mortgage underwriting is the process of deciding whether your lender (bank, broker, or credit union) is eligible for a mortgage to buy your property. You are asking for such a large amount of debt, so the lender is not going to hand it over without a thorough investigation of your financial background. A team of people working for your lender (underwriter) will look into your finances and future property. From there, they decide to extend the loan.
What does the underwriter do?
After you sign the contract, the underwriter will check your income, liabilities and assets. This is all based on the documentation you submit for each request. Of course, you will need to resubmit what you have already submitted during the pre-approval process. After that, they rate the property itself with a rating and a title search.
After collecting all the information they need, they determine the risk of lending to you and approve or reject you that tremendous mortgage.
What is included in the underwriting process?
There are several steps in the underwriting process, so it feels like it will take a long time! This is what you expect.
As a borrower, you need to submit some basic documents to your lender, such as recent pay slips, tax returns, and account statements. From here, they secure not only income to support your monthly mortgage payments, but also down payments, closure costs, and leftover funds for worst-case scenario maintenance and costs.
If your credit history has a derogatory mark, you may need to submit a statement explaining why. Submit investment asset statements such as stocks, bonds, retirement accounts and other real estate to showcase your financial position with the wealthy.
The appraisal is based on the selling price of similar properties in your area. It helps your lender understand the objective value of your new home. Upon receiving all the appropriate documents, the lender will order the appraisal. This ensures that the property is worth the amount you are paying (or more), as the property itself acts as collateral in case you default on the loan.
Usually, the lender orders the appraisal and you (buyer) are only involved when the appraisal report arrives. The cost of the appraisal is often packaged in your lender’s fee, so no action is required for you to choose and hire, or you pay the appraiser. In fact, the appraisal should be a “business-to-business transaction”. That is, neither you nor the lender can “select” an appraiser.
“Title” specifies who has the right to the property. During the underwriting, your lender wants to make sure they (and you) are protected from the flaws in the title that gives the other parties a claim for property. This could be another mortgage, lien, easement, or missing heir.
Lenders usually employ a title company to perform this final title search. And they will buy title insurance to cover their stock of property. You (and / or the seller, depending on your contract) should also purchase title insurance to protect yourself from these rare title issues.
After all, there are four possible consequences: approve, reject, suspend, or conditionally approve.
- Approval: This is easy. You have been approved and no further action is required. congratulation!
- rejection: This is rarely rejected later in the process unless economic conditions have changed since you applied for pre-approval. In that case, you can find out why it was rejected and take the necessary steps towards approval. This may include funding larger down payments or changing the type of loan you are pursuing.
- suspension: There was a hole in your application, such as not being able to confirm your employment. You can usually reactivate your application by providing the missing information.
- Conditional approval: Your financial information has been approved, but you need more documentation to be fully qualified. This includes waiting for insurance coverage certification, evaluation, or a clear title report.
What are the underwriters looking at?
Underwriters have a broad view of your finances. This too:
- Employment and salary information: Determines the ability to repay a loan.
- Bank account statement: Determines if there is a post-purchase reserve in addition to the down payment and closing costs.
- Credit score and history: This includes not only the score itself, but also late payments, foreclosures and bankruptcies.
- Debt to Revenue Ratio (DTI): Represents the amount of income for repayment of debt. It is calculated by taking your monthly total cost. This includes new mortgages underwritten using the costs of PITI (principal, interest, taxes, insurance) and applicable mortgage premiums and is divided by your total monthly income.
- Loan-to-value ratio (LTV): This takes into account appraisals, mortgage amounts and down payments. It is calculated by dividing the mortgage principal by the appraisal value, so increasing the down payment will increase this percentage.
How long does it take to underwrite?
As with any other part of the home buying process, this depends on your personal financial situation. You should play your part. This means giving all the required documents to the lender as soon as possible. The underwriting process typically lasts 30-45 days, but decisions can be made within a few weeks.
Your offer contract should state the deadline for you to apply for a loan, so make sure you work with your lender before this deadline expires to avoid breach of contract please.
Underwriting mistakes to avoid
The underwriting process is complex and delicate. Here’s what the buyer shouldn’t do while the underwriter is working:
- Ignore emails from lenders.. To make the process as fast and smooth as possible, we need to be ready to respond to requests and submit documents. Check your email at least once a day after signing a home contract.
- Offer to buy at the wrong price.. This is an exception, not a rule for underrated ratings. If the appraisal returns below the loan amount, you (and your agent) may have submitted an offer that is higher than the value of the property. To avoid appraisal issues, make sure you are looking at comparable properties in the same region sold within the last 90 days to determine the exact offer price.
- Overlook your loan limits.. Certain loan types, such as FHA and VA loans, require the property to be comfortable to live in. This includes, but is not limited to, adequate heating, roofs, electricity, appliances, a safe and usable kitchen, and at least one available bathroom. Please take this into account when offering your property to avoid underwriting future skirmishes.
- Lie to your lender.. Underwriting is basically the process of fact checking all the statements made in a loan application. If you doubt some facts about your income or savings, this will come back to bite you in this last step. If a refusal is imminent, you need to disclose everything about your financial history from the beginning so that you can get over it as soon as possible (rather than after already committing to one house and spending money on inspections). there is. ..
- Financial monkey business between “under contract” and “closed time”..“ Treat your finances like a temple to avoid danger signals during the underwriting process as soon as you sign a real estate contract. Don’t make big purchases, open new credit lines, buy new cars, change jobs, or miss payments. In fact, you should spend as little money as possible while you are looking for a home and processing your loan. (This saves extra money due to unexpected costs during the transaction.)
Underwriting is the final step in deciding whether the lender will review all your information and formally extend the loan. After signing a real estate contract, the lender will check your income, liabilities and assets and order a real estate appraisal and ownership confirmation.
In addition to being simply supportive and honest throughout the lending process, make sure you are offering at the right price and the right assets to avoid approval issues. Similarly, pay close attention to your finances and avoid large transactions throughout the home buying process to ensure a smooth underwriting process. After underwriting, you’re heading for closure — and you’re on your way to home ownership!