What is mortgage underwriting and why does it matter?
If you’ve ever taken out a loan, you’ve likely heard the term “underwriting” before. If you’ve ever wondered what underwriting is and why it’s done, we’re here to make it easier to understand — especially in terms of mortgage lending.
Essentially, underwriting is a means of protecting both the lender and the borrower in a lending situation. Before a lender can approve you for a home loan, the bank will need to be certain that you’ll be able to pay the money back with monthly payments. The process through which a bank assesses your ability to pay the debt obligation of a mortgage is called underwriting.
A bank, credit union, or mortgage company — whichever lender you choose to work with on your home loan — will assign a mortgage underwriter to your loan. That underwriter will review all your documents, check your credit history, review your current debts and financial obligations, add up your assets, and assess your potential risk as a borrower.
Once they’ve completed this review, a recommendation is made on whether or not you should be granted the loan. This process protects the bank, but it also protects you from foreclosure, bankruptcy, or both.
What happens in underwriting?
When your loan application moves into the underwriting phase, your financial information will be thoroughly reviewed. This guarantees that the lender is granting loans to creditworthy individuals who aren’t at risk of default. This is especially important for mortgages sold by the lender on the secondary market. The underwriter is ensuring that loan quality guidelines are met by federal entities like Fannie Mae, FHA, and VA.
The most that will be expected from you, the borrower, during this phase would be to supply more documentation or to clarify or explain any findings in this review of your financial history.
What is an underwriter looking for?
Through the underwriting process at UBT, a team will look at your financial details, including all of the following:
- Credit score. Do you meet the minimum credit score requirements for the loan type you’re requesting?
- Credit report. This report contains records of your payment history. Your underwriting team will want to see that you’ve historically kept up with your loan payments. During this review, they’ll also review any collection items and judgements, as well as any past bankruptcies.
- Income. Your loan processor will independently verify the earning information you provided during processing. As they review your documentation, they’ll calculate the income you can use to qualify based on a minimum of two years of earnings history.
- Debt ratio. Underwriters use a debt-to-income ratio to assess your financial flexibility. They’ll compare the income you bring in each month to your recurring payment obligations to determine whether you have enough income to cover all your existing debt plus the cost of a new mortgage added to your monthly payments.
- Savings. The underwriting team will look at your savings account to ensure you’ve got the money to make your down payment and cover your closing costs — including where you’ve obtained that money. If your savings is recent, you may be asked about the details of recent deposits. If your down payment is provided by a gift, or by selling other assets like another home, they will review documentation to understand how much of that money is available for closing.
- Title work. The title company you selected during the application process is providing the lender with a guaranteed security interest in your property. At closing, the bank places a lien on your property, which prevents you from selling it until the loan is paid in full or becomes part of the closing of a sale. (This lien is also what gives the lender the authority to foreclose on a property if a borrower doesn’t pay as agreed.) The underwriter will review the requirements set in the title commitment to ensure a successful closing.
- Insurance coverage. Underwriters need to make sure your home is fully insured and will review any insurance policy you have as part of this process.
How long does underwriting take?
The short answer: It depends. Many different factors are at play in the underwriting process. The time it takes to review your mortgage in full will vary based on the complexity of your earnings and assets, debt obligations, and many other factors. It can take as little as a few days for this review, or up to a few weeks. Rest assured your team here at UBT will work as efficiently as possible to get your mortgage closed in the shortest amount of time.
To speed up the process from a borrower standpoint, making sure all the required documentation is submitted promptly is important. Replying to any questions or requests in a timely manner is also helpful for a faster closing.
Decisions from underwriting
The final step in the underwriting process is the lender’s decision. The decision can be one of four options for the lender:
- Approved. Hooray! Financials are in order, the home’s value is in line with your offer, and the title search didn’t uncover any issues. Your lender will approve your loan and issue a “clear to close” determination on your loan.
- Denied. The lender has determined that either the property doesn’t meet their requirements to qualify for purchase, or your financials were too risky for the loan. Don’t despair; this doesn’t mean you won’t ever qualify, and your loan officer will help you understand why the denial occurred. They’ll also guide you on what steps to take so you can qualify in the future. The best way to avoid a surprise denial in underwriting is to be fully transparent about your financial situation in working with your UBT loan officer.
- Suspended. This usually indicates your lender couldn’t verify some of the information you provided, potentially your income and employment. You’ll work with your loan officer and loan processor to supply the required information or documentation to get a different decision.
- Approved with conditions. Your lender may need more information or documentation from you before they feel comfortable moving forward. They may approve you on the condition that you supply additional documents, such as pay stubs, tax returns, insurance policies, marriage certificates, or divorce decrees, among other things.
Once you’ve been approved and cleared for closing, you can set a closing date with your loan officer and title company. Congrats — we hope you do something to celebrate this milestone!
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