Underwriting is the process by which a mortgage lender figures out how risky it is to lend you money. Before choosing whether or not to accept your mortgage application, the bank, credit union, or mortgage company must find out if you are likely to be able to pay back the loan. This is called “underwriting.”
Before your application goes through screening, a loan officer or mortgage broker will gather all of the papers that are needed. Then, an underwriter checks that you are who you say you are and looks at your credit records. He or she also looks at your income, cash savings, investments, financial assets, and other risk factors.
What does a person who looks over mortgages do?
A mortgage underwriter’s main job is to figure out how much danger the lender is taking on by giving you a loan. In order to do this, they go through a number of steps that help them figure out how much money they have and how likely it is that you will be able to pay back the loan on time.
An insurer will:
Check your credit report.
- This means that your credit record, credit score, and payment history will be checked.
- Use the rules of the school. When lending money, lenders use government rules as a guide. For example, Fannie Mae’s rules say that all buyers must have a loan-to-value (LTV) ratio of no more than 97%, a credit score of 640 or higher, and a debt-to-income (DTI) ratio of no more than 36%. The lender may add its own rules on top of these.
Think about other things. Even if you don’t meet all of the above requirements, a reviewer may still approve your loan based on other things. For example, they may look at your financial reserves (such as stocks, assets, and cash) or whether you plan to live in the home if it’s a rental. If, for example, you have a poor credit score but a lot of money in the bank, you may still be able to get a loan.
Check the property’s value. Your loan acceptance will rest a lot on how much money you want to borrow and how much the house you’re buying (and using as collateral) is worth. In order to do this, an insurer will order an evaluation of the property to see if the asking price is fair based on recent sales of similar houses in your area.
The 5 Steps to Getting a Mortgage Approved
The underwriting process can take a long time. Each investor has their own ways of doing things, but the five main steps of financing are usually:
- Preapproval
- Proof of income and assets
- Appraisal
- Look up the title and get insurance
- Making a loan choice
1. Getting preapproved
Get pre-approved for a mortgage as your first step, even before you start looking for a home. A lender will look at your income and bills, as well as your credit score, to decide whether or not to preapprove you.
Remember that getting prequalified and getting preapproved are not the same. A mortgage prequalification just means that you might be able to get a loan. To get preapproval, you usually have to give the lender more information than you do for prequalification. In general, a preapproval from a loan means that you will be approved for a certain amount of credit, as long as your finances don’t change.
2. Proof of income and assets
Be ready to show proof of your pay and other financial documents, like tax reports and bank bills. Money in your bank accounts, retirement savings, investment accounts, the cash value of your life insurance policies, and business control where you have assets like stock or retirement funds will all be taken into account.
If you’re approved, your lender will send you a preapproval letter saying that, based on the information you gave, it’s ready to give you up to a certain amount. A preapproval letter shows the seller that you are a serious buyer and can back up your offer to buy with financing.
3. Appraisal
Once you’ve found a house you like that is in your price range and made an offer on it that was accepted, a lender will do an analysis of the property. This is to figure out if the price you offered is fair based on the house’s state and the prices of other homes in the area. A single-family home evaluation can cost anywhere from a few hundred dollars to more than a thousand dollars, based on how complicated and big the home is.
4. Search for the title and title insurance
An investor doesn’t want to give money for a house that has legal claims on it. So, a title company does a title check to make sure that the property can be sold.
The title company will look into the past of the land and look for debts, claims, bonds, easement rights, zoning laws, ongoing court action, unpaid taxes, and restrictive covenants. The title insurer then sends out an insurance policy that ensures that its study was correct. In some situations, there are two policies: one to protect the loan, which is almost always needed, and one to protect the property owner, which is not required but can be a good idea.
5. Deciding to insure
The best thing that can happen after the reviewer has carefully looked over your application is that you are accepted for a mortgage. That means you can move forward with the deal on the house. But you could get one of these choices instead:
Denied: If your mortgage application is turned down, you’ll need to know why. This will help you decide what to do next. If the lender thinks you have too much debt, paying down credit card amounts could help you lower your DTI ratio. If your credit score wasn’t good enough, check your credit record again for mistakes and take steps to raise it. You could try again in a few months, ask for a smaller loan, or try to save up more money for a down payment.
Suspended: This could mean that some paperwork is missing from your file, making it impossible for the insurer to make a decision. Your application could be put on hold if, for example, the insurer couldn’t confirm that you work or make enough money. The lender should let you know if you can get your application going again by giving them more information.
Conditional approval: Mortgage decisions can come with conditions, like needing to show more pay stubs, tax forms, proof of mortgage insurance, proof of insurance, or a copy of a marriage certificate, divorce order, or business license. Most of the time, this is just a small problem. You’re almost home, but the banker wants to make sure of a few more things.
Once any conditions are met and your mortgage is accepted, you are almost done buying a home. The last step is the closing day when the lender gives you the money for your loan and pays the seller in exchange for the property’s title. This is when you will sign the last papers, pay any closing costs, and get the keys to your new house.
How long does it take to get a mortgage?
The mortgage screening process can take anywhere from a few days to a few weeks, based on whether the reviewer needs more information from you, how busy the lender is, and how efficient the lender’s practices are.
The process can go more quickly and smoothly if you get your paperwork together and answer the lender’s questions quickly. But keep in mind that screening is only one part of the loan process as a whole. You can expect a loan to be closed in 40 to 50 days.
How to make the process of getting a mortgage go more smoothly
1. Have your papers in order
Before you apply for a loan, you should make sure that all of your financial papers are in order. This will help keep the mortgage underwriting process on track. For example, if you need to get information from a certain agency, do it as soon as possible. It might be a good idea to put together a file with the following:
- Information about your job from the last two years, including business records and tax reports if you’re self-employed.
- W-2s from the last two years
- Pay stubs from at least 30 to 60 days before your application.
- Information about accounts, such as checking, savings, money market, certificates of deposit, and retirement accounts
- Extra income information, such as alimony or child support, investments, bonuses or commissions, profits, interest, extra pay, pensions, or Social Security payouts.
Also, if you plan to use the money you were given as a gift for a down payment, you should have the money in your hands (in an account in your name) well before you apply. Also, you’ll need a gift letter to prove that the money really is a gift. Doing both can help you avoid problems in screening that could have been avoided.
Note that you should only give the loan the papers they ask for. When you send more paperwork, it can slow down the process.
2. Take care of your credit
If you have a poor credit score, it may be harder to get a mortgage and the interest rate on your loan may be higher, which will cost you more money.
If you want to improve your credit score, make a plan to pay down your debt. Your credit score will go up and your debt-to-income ratio (DTI) will go down. Many lenders look for a DTI ratio of 36 percent or less. That makes your application more likely in two ways.
3. Put down more money at first.
If the LTV ratio is high, it means that if you don’t pay your debt, the loan could lose a lot more money. You can lower your LTV by putting down more money upfront.
For example, if you put 10% down on a $200,000 home, you’d need a $180,000 loan, which would put your LTV ratio at 90%. If you put down 20% on the same house, you would only need a $160,000 mortgage, and your LTV ratio would be 80%. This makes you a better option for a loan because it lowers the risk for the lender.
You can work to save more money for a down payment, or if that’s not possible, you can ask family or friends for help. There are also many programs that can help with the down payment, such as deferred-payment loans and grants. Your provider may also be able to help in some way. Chase Bank, for example, will give you between $2,500 and $5,000 for your down payment if you meet certain requirements.
