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Written by
Laurie Richards
Edited by
Troy Segal
Troy Segal is a senior editor for Bankrate. She edits stories about mortgages and home equity, along with the finer financial points of owning and maintaining a home.
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Mortgage underwriting is the process the lender uses to determine whether to approve your mortgage application.
Before underwriting, a loan officer or mortgage broker collects credit and financial information for your application. The lender’s underwriting department then verifies your identity, checks your credit history and assesses your financial situation, including your income, cash reserves, investments and debts.
Many lenders closely follow underwriting guidelines issued by Fannie Mae and Freddie Mac, the two government-sponsored entities that back and buy mortgages on the secondary mortgage market.
A mortgage underwriter’s job is to measure how much risk the lender is assuming if it approves your loan. To that end, the underwriter evaluates your finances and the likelihood that you can repay the loan on time.
A mortgage underwriter will:
The mortgage underwriting process can take anywhere from a few days to a few weeks. The timeline varies depending on whether the underwriter needs more information from you, how busy the lender is and how streamlined the lender’s practices are.
Another factor is whether the underwriter uses a manual or automated underwriting process. Automated underwriting is usually completed faster than manual underwriting, but since a computer is doing the evaluation, it has some limitations that might not make it ideal for borrowers with unique circumstances, such as inconsistent income.
In these cases, it can be easier to qualify a borrower through manual underwriting as opposed to an automated system. Sometimes, lenders use a mix of automated and manual underwriting to gauge risk.
Underwriting is one of the most time-consuming parts of the home financing process, and one reason closings can take so long. The quicker you compile your documents and respond to the lender’s requests for information, the smoother and speedier the experience can be.
Keep in mind, however, that underwriting is just one part of the overall lending process. You can expect to completely close in 40 to 50 days.
Source: ICE Mortgage Technology
A mortgage preapproval is a thorough vetting process that indicates how much a lender is likely to loan you, as well as at what interest rate. A preapproval is not a guaranteed loan offer, but rather an indication of your potential borrowing capacity. You’ll often need a preapproval to make offers on homes.
The next step in the underwriting process is income, asset and employment verification. This step means the lender’s underwriter checks your credit and financial situation to confirm you’re capable of repaying the loan and also verifies your employment. You’ll need to submit documents such as W-2s, pay stubs and bank statements for verification. If you’re self-employed, you may need to provide more documents like profit and loss statements.
An appraisal is an evaluation of the property’s worth conducted by a certified appraiser. This is done to ensure that the amount you’re borrowing is in line with the value of the home you’re buying. If the home’s value falls short of the mortgage amount, you can try negotiating the price with the seller — but, more likely, you’ll need to pay the extra amount yourself. In some cases, you might need to walk away from the deal and restart the mortgage application and underwriting process with a new loan or different lender.
A lender doesn’t want to lend money for a house that has legal claims on it. That’s why a title company performs a title search to make sure the property can be transferred.
The title company will research the property’s history, looking for mortgages, claims, liens, easement rights, zoning ordinances, pending legal action, unpaid taxes and restrictive covenants. If an issue arises with the title search, you have a few options. You can either see if the seller will fix the issue before closing day, request that the seller compensate you to fix the issue or you can walk away from buying the home.
The title insurer then issues an insurance policy that guarantees the accuracy of its research. In some cases, two policies are issued: one to protect the lender (this is almost always required) and one to protect the property owner (optional, but can be worth getting).
Once the underwriter is satisfied with your application, the appraisal and title search, your loan will be deemed clear to close and can move forward with closing on the property.
If things don’t go smoothly, you might receive one of these decisions instead:
Once you clear any conditions and get your mortgage approved, your home purchase is nearly complete. The final step comes on closing day, when the lender gives you the money, and you pay the seller. You’ll sign the final paperwork, settle any closing costs and receive the title and the keys to your new home.
The mortgage underwriting process can be complicated and time-consuming, but there are things you can do to help it go more smoothly:
The best way to keep the mortgage underwriting process on track is to have all of your financial documents organized before you apply for a loan.
Try to have the following ready when you apply:
A lower credit score can make it more difficult to get approved for a mortgage, and make your loan more expensive with a higher interest rate.
Work to enhance your creditworthiness by:
The mortgage underwriter also considers the LTV ratio of your deal: how much money you’re borrowing, also called the loan principal, divided by the property’s value. A higher LTV ratio indicates the lender could lose a lot more money if you default on the mortgage.
You can reduce your LTV ratio by making a larger down payment upfront. The larger the down payment you make, the easier it can be to qualify.
Don’t be afraid to ask family or friends for help making a down payment — either as an outright gift or a personal loan. You can also look for down payment assistance programs you might qualify for. Other ways to save for a larger down payment include opening a high-yield savings account, automating a portion of your income to go to a savings account. You could also consider borrowing from your 401(k) or making an IRA withdrawal — there are special provisions for using funds for home-buying.
Mortgage underwriters do a deep dive into your credit report and financial history, so don’t lie on your application. If you have a negative mark on your credit report, like a missed payment, tell the lender and explain what happened. The lender might be more lenient with a delinquency if you were dealing with extenuating circumstances and later made good on the payment.
A booming housing market might lead to longer underwriting times due to a higher number of loan applications. In contrast, a slower market might mean quicker reviews. To avoid delays, submit an accurate and complete application and respond swiftly to any requests for additional documents.
Underwriting delays can stem from issues like unexplained gaps in your employment history, unverifiable funds or a low home appraisal. To prevent these issues, be prepared with all necessary documents, respond quickly to lender inquiries and ensure your financial documents are comprehensive. Keeping open lines of communication with your lender and being organized can help avoid many common delays.
