You’ve gotten your pre-approval paperwork, found the perfect property, and had your offer accepted. However, you’re not quite ready for the keys just yet. Instead, you have to go through the underwriting process. But what does this process entail for home buyers, and how long does it take?
Here’s everything you need to know:
What Is Mortgage Underwriting?
Mortgage underwriting is the part of the mortgage process wherein your lender verifies the information you presented on your loan application. This comes after the pre-approval process and after your offer on a property has been accepted.
A mortgage underwriter will look into your financial situation to ensure that you still qualify for the home loan. They will also make sure that the property is worth what they’re lending you. Essentially, they’re doing their due diligence with the end goal of getting their money back.
What Documents Are Required for Mortgage Underwriting?
The mortgage underwriting process can be frustrating and tedious due to the sheer amount of documentation required. However, it’s important to come prepared with all required documentation to help the process go as smoothly as possible.
While different lenders may require different documents for underwriting, here’s a general guide to some of the documents you should expect to provide your lender with for underwriting:
ID and Social Security number for identification purposes
Two most recent pay stubs if paid on a bi-weekly basis or all pay stubs from the last 30 days if paid weekly, monthly, etc.
W-2s or I-9s from the past two years
Proof of any other sources of income
Federal income tax returns from the past two years
Recent bank statements from the past two months
Other statements from retirement accounts, investment accounts, etc.
Debt statements from student loans, auto loans, etc.
What Do Lenders Look at During Underwriting?
Mortgage lenders typically look at the “three C’s” during the underwriting process: credit, capacity, and collateral.
Here’s what you need to know about each to satisfy their requirements and receive your loan:
Underwriters determine your creditworthiness by looking at your credit history. Your credit history demonstrates how you’ve handled repaying debt in the past by taking into consideration your payment history, credit utilization ratio, and credit history length.
The three national credit reporting agencies then take this information and translate it into a score to demonstrate your reliability and trustworthiness in a credit check.
According to Experian, one of the three national credit reporting agencies, an excellent credit score ranges from 781 to 850, a good credit score ranges from 661 to 780, a fair credit score ranges from 601 to 660, and a poor credit score ranges from 500 to 600.
Most lenders want to see a credit report above 620 to qualify for a mortgage loan, but credit scores over 740 warrant the best interest rates.
Underwriters determine your capacity to repay the loan by making sure that your monthly debts aren’t greater than your monthly income. By taking your monthly debts and your monthly income, they’re calculating your debt-to-income ratio (DTI) to see if you can afford your new home.
Generally speaking, lenders want to see a DTI of less than 36%, with no more than 28% of that debt going towards housing-related costs like rent or mortgage payments. But, you may still be able to secure a mortgage loan with a DTI of up to 43%.
Finally, underwriters look at your collateral to make sure that they will still be able to get their money back in the event that you default on the loan. In the case of a mortgage loan, they are mostly concerned about the value of the property in question.
To determine the property’s value, they will order an appraisal that compares the condition and features of the property with other properties that have been recently sold in the same area (the market value).
From there, the underwriter will calculate the loan-to-value ratio (LTV) by dividing the loan amount by either the purchase price or the appraised value of the property( whichever is lower). A loan with a high LTV presents a greater risk to the lender and may require the borrower to pay private mortgage insurance (PMI) to help offset this risk.
How Long Does Mortgage Underwriting Take?
The timeline for mortgage underwriting tends to vary depending on a number of different factors. In a perfect world, the underwriting process can take as little as a few days. However, if any issues come up along the way, it could end up taking weeks.
Delays in the underwriting process can easily delay the overall closing process. And delaying the closing process could risk the entire sale, especially in such a competitive market. There are likely other buyers lined up, ready and waiting for the sale to fall through.
That’s why it’s so important for would-be homeowners to take the underwriting process seriously and make sure that it’s completed favorably as soon as possible.
What Are the Different Underwriting Decisions?
There are four potential underwriting decisions that you need to be prepared for: approved, approved with conditions, suspended, and denied.
Let’s go over what these different decisions mean and how to address them:
In an ideal world, your loan will be approved after underwriting. If you were honest through your mortgage application process, provided all requested documentation, and didn’t experience any financial changes, there’s a high chance that your mortgage application will be approved. This chance is even higher if you receive a pre-approval from the lender.
2. Approved With Conditions
However, sometimes your mortgage application won’t be approved outright and will instead be approved “with conditions.” What this means is that the lender is requiring additional documentation in order to receive final approval.
For example, they may need to see your marriage certificate or divorce decree. They may also need to see your business license or proof of your mortgage insurance policy.
Your mortgage application can be suspended if the underwriter isn’t able to fully evaluate your application due to missing documentation or information. For instance, if you didn’t provide them with your income tax returns or if your employer didn’t get back to them to verify your employment history, your application could be suspended. To reactivate your mortgage application, you need to address the delinquent items.
Finally, your mortgage application can be denied if it’s determined that you do not meet the lender’s qualification requirements. In most cases, the underwriter will provide you with the specific reason as to why your mortgage application was denied so that you can take action to address these items.
For example, if your credit score took a hit between pre-approval and the actual application, you may end up getting denied. If this happens, you may need to build your credit score back up before you can apply for a mortgage again. Or, if you took on too much debt between pre-approval and the actual application that increased your DTI, you may need to pay off some of this debt before applying again.
How To Make Mortgage Underwriting Go Quickly and Smoothly
Although the mortgage underwriting process can be intense and lengthy, there are things you can do to ensure that it goes as quickly and smoothly as possible:
Provide any and all documentation: The amount of documentation required for the underwriting process may seem like overkill, but it all serves a purpose. As a result, it’s important to provide your underwriter with all the additional information they need in a timely manner so that they can make a quick judgment.
Be honest about the information you provide: While it may be tempting to leave things out of your application to receive a favorable result, this could actually end up hurting your chances. Underwriters are trained to spot red flags in your application, so instead of being misleading, be upfront about any potential issues so that you can work to find a solution.
Be as detailed and helpful as possible: Even though your underwriter definitely asks for a lot, it might be a good idea to provide them with even more than they initially asked for. That way, they don’t have to come back to you with questions that could delay the process. And if they do come back to you with questions, be as helpful as possible by providing them with what they need.
Do not take out any additional loans or use any credit: Avoid applying for loans and using credit during the underwriting process, as doing so could change your DTI and your credit score. Then, you may no longer qualify for the loan. So for the sake of the underwriting process, don’t buy new assets like a new car or finance furniture for the new house until after closing.
Stay in touch: Reach out to your underwriter consistently throughout the process to check in and see if they need anything else to speed up the process. Doing so shows your underwriter that you’re invested in the process and are willing to go the extra mile to get a favorable result on your mortgage application.
What Happens After Mortgage Underwriting?
After you have received your final loan approval, your lender will clear you to close on your property. From there, you will set a closing date to finalize the transaction. Before closing, however, you will attend a final walkthrough wherein you inspect the property to make sure that it’s in good condition before you actually purchase it.
At this point in the process, the seller should have moved all their belongings out — being sure to take what they were supposed to take and leave what they were supposed to leave. This is based on the terms of the purchase agreement.
It’s always a good idea to schedule the final walkthrough as close to the closing as possible so that there’s little room or time for error. It’s also a good idea to attend the final walkthrough with your real estate agent since they are more familiar with the process and know what to look for.
After the final walkthrough, it’s time to close. During closing, you will pay your closing costs to the lender, sign your loan documents, pay the down payment, pre-pay taxes, insurance, and interest, before finally transferring ownership of the property. Then you get your keys and are all set to move in.
Guidelines on Mortgage Underwriting
While you play a huge role in the mortgage underwriting process, so does your lender. So if you’re looking for quick underwriting and closing processes, you should consider a private lender like Vaster.