Buying a new home is the biggest purchase of your life. So, it makes sense that the financial institutions will want to verify that you can truly afford it or not. The loan officers or mortgage lenders verify your financial situation through a process known as the underwriting process.
If you are planning to buy a home, you should be really familiar with the underwriting process and how it works. As it truly determines whether you can land your dream house or not.
What is Mortgage Underwriting?
It’s true that the term Mortgage Underwriting can seem very complicated but let’s break it down here. In simplest words, mortgage underwriting is the process through which the lender assesses your ability to afford the mortgage. The mortgage lender is basically assessing whether he can trust you with his money or not.
The loan officer or the mortgage lender assesses many documents that can determine your financial situation. The underwriter then, verifies your identity, your credit history, and evaluate your financial situation which include your financial assets, income, equity investment and other risk factors.
You submit your loan application along with all of the above mentioned documents (more or less depending on your lender) and an expert called the underwriter reviews it. He, then determines if you are a trustable business to invest money in or not.
Many banks and loan officers follow the assessment criteria of Fannie Mae and Freddie Mac, the giant government-sponsored enterprises. They either evaluate your documents manually or run them through a software to make a decision about your application.
What does a Mortgage Underwriter look for?
To determine if you qualify for a mortgage or not. The underwriter typically look for three C’s i-e Credit, Capacity and Collateral. Let’s look at them in a little detail to figure out what do they mean and how they impact your mortgage application.
- Credit
By credit, we mean your credit history and payment records. It is one of the most important factor in determining your eligibility for the home loan. The underwriter looks if you have a solid credit and repayment history or not.
If you have paid your past rent payments, utility payments, student loans, credit card payments and even insurance payment on time, you will be evaluated as a trustworthy candidate by the underwriter. But if you do not have a good credit history, don’t worry and take your time to improve your credit history. Pay off your loans and bills, and it will eventually improve your credit history.
- Capacity
By capacity, we mean resources to pay off your debt. The underwriter assesses your resources by evaluating your employment history, your debt, your income and your asset statements.
The underwriter will also review your savings, IRA accounts and 401(k) to evaluate that you can still pay your mortgage in case you lose your job or fall sick. They also look if you have any other financial responsibilities like child support or alimony. Underwriters also also pay special attention to your debt-to-income ratio while assessing you application.
By considering all these factors, they evaluate that if they lend you the money, you will be able to repay it on time or nor.
- Collateral
By collateral, we mean the value of the home you are buying and the down payment you are making for it. The underwriter needs to verify the value of the home you are buying. They do not want to invest money in a house which is not worth its value.
The underwriter typically order a home appraisal and needs a property surveillance as well which include property lines of the land and the placement of the home on that property. Then, they ensure that there are no un-paid taxes or liens on the property to make a final decision.
The underwriter also examines the amount you are willing to pay as the down payment. The bigger your down payment is, the less risk it is to lend you the money. Therefore, putting more money upfront as the down payment will definitely improve your chances of getting approved for the home mortgage.
What to expect in Mortgage Underwriting Process?
The underwriter will typically grant you one of these three decisions; Approved, suspended or denied.
Approved: If your application is approved, you will probably have to meet certain conditions before full approval and get a “clear to close” signal. Try to fulfill all the conditions asked by your lender as soon as possible and also keep your lender updated about the situation.
Suspended: If your mortgage application is suspended, it means your underwriting process has become even more confusing now. Discuss the reason of your suspended application with your lender and see what you can do now to get approved for the mortgage loan.
Denied: If your mortgage application is denied, it means you have to improve your documents. There can be a lot of reasons behind your application getting rejected. But the most important reasons could be your credit score not meeting the lender’s eligibility criteria, less down payment or some missing important documents.
In any case, try to figure out the reason behind this. Find a solution and make a new mortgage application.
What are the steps in Mortgage Underwriting Process?
Here are the steps that need to take place in a mortgage underwriting process
- Apply for the Mortgage
The first step in the mortgage underwriting process is filling out an application for the mortgage. You can either do this in person or you can do this electronically if your selected lender allows. If you are not sure about the process and the required information for the application, ask your lender for the help.
- Receive the Loan Estimate
The next step after submitting your mortgage loan is to receive a loan estimate from your lender. This estimate will contain the information about how much monthly mortgage payments you will make, interest rate of your mortgage, and the total cost of your house.
Although it is just an estimate, review it carefully to determine if you can really afford the costs mentioned in the estimate or not.
- Get your loan processed
Now is the time to get the processing start. Your lender will ask you for your personal and financial documents that are necessary to complete the process and get you verified for the mortgage.
The best thing you can do during this time is to respond promptly to your mortgage lender for any missing information or documents to speed up the process.
- Wait for the application to be approved, suspended or denied
After processing of your documents, your lender will now decide whether to approve, suspend or deny your application based on the evaluation results of your documents.
- Fulfill the conditions
If your mortgage application was approved with some conditions, this is the time to work with your lender and fulfill those conditions so you can close your mortgage deal as soon as possible.
Once you have met all the conditions, you will get a “clear to close” approval from your lender. This means your mortgage is ready to be finalized now.
- Close the Deal
You will receive a “Closing Disclosure” at least three days before your closing date. You should utilize this time to review your monthly mortgage payments and the amount to bring to closing.
The final step in your home underwriting process is “closing day”. It is the day when the bank pays the purchase amount of your house to the selling party in exchange for the title to the property. This is when you sign the final paperwork and settle the due closing costs. Once you sign the contract, you will receive the keys to your new home.
However, know that, this underwriting process can be quite time-consuming and a little over-whelming without the help of a professional. Affiliated Mortgage team can you help you in getting underwriting process done smoothly and in a very short time. Feel free to contact our experts anytime!
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