Did you ever wonder what’s happening behind the scenes during mortgage underwriting? For many homeowners, securing the financing they need is essential to successfully purchase a home. Underwriting is an important step in your chosen mortgage lender’s approval process.
What is underwriting?
Your mortgage lender uses underwriting to take steps to verify your income, assets, debt, and property details along the path to approving your home loan. It’s a way to reduce the mortgage lender’s risk in providing you with the funds while ensuring you can actually afford the home you would like to buy.
What do you need for underwriting?
Your mortgage officer or lender will ask for a range of documents that answer questions concerning your income and ability to afford the home. These documents likely will include your tax returns, pay stubs, W-2s, W-9s, gift letters, and bank statements.
The lender will assess any debt you have, such as monies owed on vehicles, student loans, credit cards, or furniture. The lender looks at any retirement savings and investments. Taken together, these paint a picture of your financial health.
What will happen during underwriting?
An underwriter is a financial expert specifically trained to do this kind of risk assessment work. The individual looks at your finances to determine how much risk the lender can take if they decide you qualify for a loan.
Essentially, this underwriter decides if your loan will be approved or not. They want to ensure you don’t receive a mortgage that you cannot afford and risks the lender initiating foreclosure proceedings.
During the underwriting process, the underwriter will:
#1-Review your credit report
The credit report shows your credit score and how you used your credit in the past. They search for red flags like bankruptcies, late payments, and overuse of credit. A clear record with a good credit score shows that you are responsible about repaying debts. This improves your chances of loan approval plus better loan terms and interest rates.
#2- Review your home appraisal
The underwriter reviews the appraisal on the intended home. The appraisal is to verify that the amount you are asking for in funding aligns with the home’s actual value. The appraiser pulls comparable sales from the neighborhood and inspects the home to make sure the purchase price is reasonable.
#3- Verify your income
The underwriter needs to prove your employment situation and actual income. You typically need three types of documents to verify your income, including:
- W-2s from the last two years
- Recent bank statements
- Your most recent pay stubs.
If you are self-employed or own a large share of a business, your underwriter will look for different documents like your profit and loss sheets, balance sheets, and personal and business tax returns.
The underwriter may ask questions about where certain deposits came from or for you to provide additional proof of assets.
#4-Assess your debt-to-income ratio
The debt-to-income ratio is a figure that shows how much money you spend versus how much money you earn. DTI is calculated by adding up your monthly minimum debt payments and dividing it by your monthly pretax income. The underwriter compares your debts to your income to verify you have enough income to afford your monthly mortgage payments, taxes, insurance.
In addition to monthly income verification, the lenders want to see your assets because these can be sold for cash if you default on your mortgage payments.
#5- Verify down payment
Lenders want to make sure you have enough funds to cover the down payment and closing costs on the home purchase. Underwriters also look at your bank statements and savings accounts to ensure that you have the funds your sale and purchase agreement outlines you would make at closing.
How long does loan underwriting take?
Depending on how busy the underwriter is, the approval process can take 2 to 3 business days to work through the different steps. Other parties can hold up the approval process, such as the appraiser, title insurance, and any other external items in the process.
Help speed along the underwriting process by actively responding to any requests from the team. Respond to any questions quickly and honestly. Avoid opening new credit lines during the process, as that will complicate your approval.
After underwriting is finished
Once the underwriter is complete, they will approve, approve with conditions, suspend, or deny the loan application. The approval will give you the all-clear to close on the home purchase. For any other determination, review the reason and see if you can take steps to improve your chances of a future approval.
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