Income check, property appraisal among things to expect during underwriting process
What is mortgage underwriting?
Mortgage underwriting is a critical step between shopping for a home and becoming a homeowner. During this process, a lender will take a deep dive into your financial background and credit history to determine whether you are eligible for a loan—i.e., whether you are an acceptable risk as a borrower. Typically, mortgage underwriting happens once you have been pre-approved for a home loan.
Working with you to ensure that you submit the proper paperwork, a mortgage underwriter basically wants to make sure that you do not close on a deal that you will not be able to afford. The mortgage underwriter will deny your loan if you fail to qualify.
So how does a mortgage underwriter make their decision?
Underwriters will investigate your credit history, pulling your credit report and looking at your credit score. Searching through your overall credit score, underwriters look for bankruptcies, overuse of credit, and late payments, among others.
Mortgage underwriters will also order an appraisal to ensure that the value of the home matches up with the amount the lender offers.
You will also be asked to prove your employment situation and income, to verify your savings and down payment, and provide your debt-to-income ratio (DTI). A DTI is the percentage how much income you earn versus how much money you spend. In this instance, the underwriter wants to make sure that you have the cash flow to cover your taxes, monthly mortgage payments, and insurance.
Things to expect during the underwriting process
During the mortgage underwriting process—which directly evaluates your previous credit decisions and finances—your underwriter will focus on five aspects that will provide them with a clearer picture of your situation: income, appraisal, down payment, credit, and asset information.
Income. Your underwriter will need to ensure that you earn more than enough income to pay your mortgage each month, which means you will have to provide these documents: your most recent bank statements, W-2s from the previous two years, and your two most recent pay stubs.
If you own a sizable share in a business, or are self-employed, you will be need to provide some documents instead of W-2s: K-1s, your business and personal tax returns, profit and loss sheets, and balance sheets.
Additionally, your underwriter will verify your work situation with your employer and that your income and the income you reported match up.
Appraisal. These are almost always required when you buy a house, providing protection both for your lender and for yourself because they make sure that you only borrow what the house is worth. To evaluate the features and the condition of the house, the appraiser will walk through the property during an inspection to take measurements and pictures. Your appraiser usually compares houses or properties by looking for houses that are similar in size, features, and location.
Following the appraisal, your underwriter will then compare what he or she has found to the price of the mortgage. Your underwriter might suspend the application if the house is worth far less than the mortgage. If that happens, you can walk away, negotiate with the seller to lower the buying price, or contest the appraisal.
Credit. Your underwriter will also evaluate your credit score, a three-digit number that evaluates how good you are at paying off your debts. For instance, a strong credit score shows you are prompt when paying off your debts, helping you to qualify for lower interest rates.
If you are applying for a conventional loan, your credit score should be somewhere around 620, but the minimum score you will need depends on the type of loan you are pursuing. The minimum credit score for an FHA loan is 580, although there is no minimum for VA loans, but individual lenders might set up their own minimum requirements.
To look at your credit usage, payment history, and the age of your accounts, your underwriter will also pull your credit report, which will provide the underwriter with your debt-to-income ratio (DTI).
Asset information. Since they can be sold for money if you default on your mortgage payments, your assets will help you receive mortgage approval. To gather asset information, your underwriter may look into your savings and checking accounts, stocks, personal property, and real estate. Lenders also use assets to make sure that you can make your monthly mortgage payment after you pay closing costs, since closing can range from 3-6% of the loan price.
How long does it take for the underwriter to make a decision?
Since each situation is unique, your mortgage underwriter could take a few days or several weeks to reach a decision. It is common for the underwriting process will take three to six weeks. Missing documentation or signatures, or issues with the title insurance or the appraisal, are just a few factors that can delay the process. In other words: the sooner the underwriter has all the necessary documents, the sooner the mortgage application can be processed—so it is critical to get everything to the lender as soon as possible.
What to do while waiting for the decision
The bottom line: be patient while waiting for the decision and ensure the correct documentation and signatures have been submitted. While your loan is being processed, make sure to keep your debt in check; stay in touch with your lender; and always—always—be honest and up front regarding your finances.