Understanding the Mortgage Underwriting Process
Key Points
- When you apply for a mortgage, lenders use a process called underwriting to determine whether to approve or deny your loan.
- When deciding on your loan, underwriters consider factors such as your credit history, financial profile, and home appraisal.
- The subscription process involves several steps, which may take days or weeks to complete.
What is Mortgage Underwriting?
Mortgage underwriting is when a lender determines whether to approve your mortgage application.
Before underwriting, a loan officer or mortgage broker gathers credit and financial information for your application. The lender's underwriting department then verifies your identity, checks your credit history, and evaluates your financial situation, including your income, cash reserves, investments, and debts.
Many lenders follow underwriting guidelines issued by Fannie Mae and Freddie Mac, two government-sponsored entities that underwrite and buy mortgages in the secondary mortgage market.
What does a mortgage insurer do?
A mortgage underwriter decides how much risk a lender will take if they approve your loan. To do this, the insurer evaluates your finances and the likelihood that you will be able to repay the loan on time.
A mortgage insurer must:
- Check your credit history. This includes researching your credit report, credit score, and payment records.
- Check your finances. Lenders use specific guidelines as a basis for financing. For example, Fannie Mae's conventional lending guidelines require all borrowers to have a maximum loan-to-value (LTV) ratio of 97%, a minimum credit score of 620, and a debt-to-income (DTI) ratio of 36. There must be more. The lender can complement them with their criteria. It will also analyze the details of your financial situation. For example, you can consider your financial reserves (investments, assets, or savings) or if you will leave the property with tenants if it generates income.
- Request a property appraisal. Your loan approval mainly depends on the amount you are borrowing versus the value of the home you are purchasing. An insurer will order an appraisal of the property to see if the sale price aligns with its appraised value.
- Make a decision. Once all the reports and paperwork are ready, the mortgage insurer will approve or deny your application.
How long does it take to sign a mortgage?
The mortgage underwriting process can take a few days to a few weeks. The timeline depends on whether the insurer needs more information from you, how busy the lender is, and how smooth their procedures are.
Another factor is whether the insurer uses a manual or automated underwriting process. Automated underwriting is usually completed faster than manual underwriting. Still, because a computer does the assessment, it has some limitations that may need to be revised for borrowers with unique circumstances, such as unbalanced incomes.
In these cases, qualifying a borrower through manual underwriting may be easier than an automated system. Lenders sometimes use a combination of automatic and manual underwriting to measure risk.
Underwriting is one of the most time-consuming parts of the home financing process and can take just as long to close. The faster you submit your documents and respond to the lender's requests for information, the smoother and quicker the experience can be.
However, underwriting is only one part of the loan process. You can expect to close the loan entirely within 40 to 50 days.
Steps in the mortgage subscription process
1. Get Pre-Approved.
A mortgage pre-approval is a thorough vetting process that indicates how much a lender will lend you and at what interest rate. A pre-approval is not an offer of loan guarantee but an indication of your potential borrowing capacity. You will need pre-approval to make offers on homes.
2. Verification of Income, Assets and Employment
The next step in the underwriting process is verifying income, assets, and employment. This is when the lender's underwriter checks your credit and financial situation to confirm that you can repay the loan and also verifies your employment. You must submit documents such as W-2 forms, pay stubs, and bank statements for verification. If you are self-employed, you may need to provide additional documents, such as profit and loss statements.
3. Appraisal
An appraisal is a certified appraiser's assessment of a property's value. It ensures that the amount you are borrowing aligns with the value of the home you are buying. If the home's value doesn't cover the mortgage amount, you can negotiate a price with the seller, but you'll likely have to pay the extra money yourself. Sometimes, you may need to exit the contract and start the mortgage application and underwriting process with a new loan.
4. Title Search and Title Insurance
A lender wants to avoid paying for a home with legal rights. That's why a title company ensures that ownership can be transferred.
The title company will investigate the property's history, looking for mortgages, claims, liens, easements, zoning ordinances, pending legal actions, unpaid taxes, and restrictive covenants. If you need help finding your title, you have a few options. You can see if the seller will fix the problem before closing day, request that the seller pay you to correct the problem, or you can stop buying the home.
The title insurer then issues an insurance policy that guarantees the accuracy of their investigation. There are two policies in some cases: one for lender protection (almost always mandatory) and one for owner oversight (optional but obtainable).
5. Underwriting Decision
Once the underwriter is satisfied with your application, appraisal, and title search, your loan is considered ready to close, and you can proceed with closing on the property.
If things don't go well, you may receive one of these decisions:
- Denied: If your mortgage application is rejected, determine why the lender denied it before taking the following steps. For example, if the lender believes you owe too much, you can lower your DTI ratio by paying off your credit card balance and reapplying.
- Suspended: This may mean that some documents are missing from your file. Your application could be stopped if, for example, the insurer could not verify your employment or income. The lender can tell you if you can reactivate your application by providing more information.
- Conditional approval means your loan is approved with no pending condition, such as obtaining a homeowners insurance policy. It would help if you were allowed to close after you provide proof of what is missing.
Once you clear the conditions and approve your mortgage, your home purchase is almost complete. The final step is the closing day when the lender funds your loan and pays the selling party for the title to the property. This is when you'll sign the final paperwork, settle the closing costs, and receive the keys to your new home.
Tips for a Smooth Mortgage Underwriting Process
The mortgage underwriting process can be complicated and time-consuming, but there are things you can do to make it easier:
1. Organize your documents.
Organizing your financial documents before applying for a loan is the best way to ensure that the mortgage underwriting process is on track.
Try to have the following ready when you apply:
- Employment information for the past two years (if self-employed, includes business records and tax returns)
- W-2 for the past two years
- Payment receipts from at least 30 to 60 days before application.
- Account information, including checking, savings, money market accounts, certificates of deposit (CDs), investment accounts, and retirement accounts.
- Additional income information, such as alimony or child support, annuities, bonuses or commissions, dividends, interest, overtime pay, pensions, or Social Security payments.
- A gift letter if friends or family have given you funds to make a down payment.
2. Get your credit in shape.
A low credit score can complicate getting approved for a mortgage and make your loan more expensive with higher interest rates.
Work to improve your reputation:
- Pay off 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.
3. Make a significant down payment.
A mortgage insurer also considers your deal's LTV ratio: how much you're borrowing, also known as loan principal, divided by the property's value. A high LTV ratio indicates that the lender will lose money if you default on your mortgage.
You can lower your LTV ratio by making a larger down payment. The bigger your down payment, the easier it is to qualify.
Don't hesitate to ask family or friends to help you make the down payment. You can also see the payment assistance programs you may be eligible for below. Other ways to save for a more significant down payment include:
- Opening a high-yield savings account.
- Automatically, having a portion of your income goes into a savings account earmarked for your down payment.
- Cutting back on your expenses.
4. Be honest about your financial history
Mortgage underwriters look closely at your credit report and financial history, so don't lie on your application. Tell the lender and explain if you have a negative mark on your credit report, such as a late payment. Lenders may be more lenient on late fees if you go through stressful situations and then make payments.
Mortgage Underwriting Frequently Asked Questions
How does the state of the real estate market affect the duration of the underwriting process?
A hot real estate market can result in longer underwriting terms due to more loan applications. Conversely, a slower market can mean faster valuations. To avoid delays, please submit an accurate and complete application and respond promptly to any requests for additional documentation.
What can cause delays in the underwriting process, and how can they be avoided?
Delays in underwriting may be due to unexplained gaps in your employment history, unverified funds, or low home appraisals. To avoid these problems, be prepared with all necessary documents, respond promptly to lender inquiries, and ensure your financial records are complete. Keeping open lines of communication with your lender and being organized can help avoid many common delays.
The bottom line
The mortgage underwriting process involves a comprehensive evaluation of your financial health and creditworthiness to determine whether you qualify for a mortgage. It involves several steps, from loan pre-approval to the final underwriting decision. To simplify the process, keep your paperwork organized, make sure your credit is in good standing, consider making a sizeable down payment, and be honest about your finances.
