84 million—that’s how many mortgages are currently outstanding in the US! This shows that borrowers take out loans, likely due to insufficient cash reserves. However, 32% of all mortgage applications get rejected in underwriting due to poor-debt-to-income ratio.
Mortgage underwriting is the process lenders use to assess an applicant’s finances to decide loan eligibility. It is mandatory for mortgage approvals. A pre-approval can help you gauge your loan amount and boost your chances of a successful application.
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What Is Mortgage Underwriting?
It is a process in which an underwriter collects your financial information like income, assets, debt, credit, and property. They check your eligibility for the loan, and whether you will be able to repay it in time.
The issuance of final approval on your loan application depends on the underwriter’s evaluation. They may either approve, reject, suspend, or conditionally approve the application.
How Long Does Underwriting Take?
The process could take around 30 to 45 days. The time taken depends upon factors such as the real estate market, and the complexity of the application.
During busy homebuying seasons, underwriters may take longer to process mortgage applications. The borrower’s profile, financial history, and the underwriter’s experience can influence how quickly they process applications.
Types of Mortgage Underwriting
The following are the two types:
Manual Underwriting
In manual underwriting, the underwriter is assigned to determine the repayment capacity of the applicant. They critically evaluate the documents that are required by the lender.
Manual underwriting facilitates a nuanced approach and allows the lender to consider the different situations of a mortgage applicant.
Automated Underwriting Systems
These are tech-based systems that reduce the completion time. These automatic systems are well-suited to applicants with high credit scores, or low debt-to-income ratio.
Automated underwriting systems can handle a larger volume of applications simultaneously. They are more objective in their evaluation, and do away with human bias.
How Does the Mortgage Underwriting Process Work?
The approval procedure involves the followings:
Pre-Approval
Mortgage pre-approval gives you a clear idea of what your budget would be. It shows sellers that you are a serious buyer. The pre-approval letter contains the lender’s commitment to go ahead with the loan. This is on condition that your financial situation remains unchanged.
Mortgage Underwriting Checklist
You need to submit several documents to the underwriter, in order to prove your financial stability. The underwriter verifies whether you can cover the down payment while being able to maintain cash reserves as well.
Your credit history is an important marker of your tendency to repay loans. For instance, a background of foreclosure, or short sales would adversely impact your credit score. This might lead to denials of loan, or higher interest rates.
Income and Employment Verification
The underwriter submits a pre-approval for the loan only when they are fully satisfied with your income levels. For this, they need the following documents:
- Bank Statements
- Income Tax Returns
- Pay Stubs
- W2s
- Alimony or Child Support Documents
- Retirement and Investment Accounts
- Rental Payment History
Property Appraisal
The underwriter needs to get a home appraisal done to know the property’s current market value. This affects the terms of the mortgage loan.
Title Search and Title Insurance
Lenders do not approve loans for a property that has pending legal claims. For this reason, a title search is conducted on the history of the property. This is to find any pre-existing mortgages, claims, zoning regulations, restrictive covenants and so on.
A title insurance protects the real estate owner as well as the lender from losses due to pre-existing defects in the property.
Risk Assessment
Lenders analyze the risk of providing mortgage to you based on the following factors:
- Debt-to-Income Ratio: The DTI measures the relation between your debt and your monthly income. The monthly payments are calculated on the basis of recurrent costs, such as housing payments, etc.
- Loan-to-Value Ratio: To calculate this, compare the loan amount requested to the value of the collateral property. Higher LTV ratios can cause lenders to charge higher interest rates.
Underwriting Decisions
Mortgage underwriters can make one of the following decisions regarding your application:
- Approval: You have satisfied the conditions specified by the lender, and are eligible for final approval.
- Denial: You do not meet the lender’s criteria for a mortgage.
- Suspension: You could not produce sufficient information to process your application, which put a hold on your application,
3 Tips for a Successful Mortgage Underwriting Process
To increase your chances during the underwriting process, you should follow the steps below:
Improve your Credit Score: You can increase the credit score if you do not apply for any additional lines of credit. If you have pending debts, make sure to settle them.
Make a Larger Down Payment: From a lender’s perspective, a larger down payment means lesser exposure to risk. This will improve your chances in underwriting approval.
Calculate Your Net Worth: This is important for the underwriter to understand your ability to meet expenses at time of an emergency. For this, you need to estimate your savings, insurances, and account balances.
How Should I Approach Mortgage Underwriting?
You must work on your credit score and try to make a larger down payment. Also ensure that you are transparent with the underwriter throughout the process. These steps will help you get approved for a mortgage, which you can use to purchase a new home.
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Frequently Asked Questions
Can you challenge a negative mortgage underwriting decision?
No, you should not challenge the underwriter's decision once the mortgage underwriting process is complete. It will most likely not be productive.
Why does mortgage underwriting take so long?
The underwriting process requires extensive scrutiny of several documents. The time taken for mortgage underwriting depends upon several factors. These include the number of other applications received, the type of loan being applied for as well as your financial situation.
What happens after mortgage underwriting?
The lender will conduct a final review and a quality control check. You will receive a closing disclosure which would include the loan amount and the closing costs.
