5 key steps in the mortgage underwriting process

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If you’re like most people who buy a home, you take out a mortgage to finance the purchase. The process that lenders use to assess your creditworthiness is called underwriting.

What is mortgage underwriting?

Underwriting is the mortgage lender’s process of assessing the risk of lending money to you. The bank, credit union or mortgage lender has to determine whether you are able to pay back the home loan before deciding whether to approve your application.

A loan officer or mortgage broker collects the many documents necessary for your application. An underwriter then verifies your identification, checks your credit history and assesses your financial situation — including your income, cash reserves, equity investment, financial assets and other risk factors.

Many banks closely follow underwriting guidelines from Fannie Mae and Freddie Mac, the government-sponsored enterprises that keep the U.S. mortgage market running smoothly.

Automated underwriting vs. manual underwriting

A mortgage underwriter can assess your loan application manually or run it through a software program, known as automated underwriting, to determine whether to approve you for a loan.

Automated underwriting is usually completed faster than manual underwriting, but since a computer is doing the evaluating, it has some limitations that may 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, too, lenders use a combination of automated and manual underwriting in order to gauge risk.

What does a mortgage underwriter do?

A mortgage underwriter’s job is to assess delinquency risk, meaning the overall risk that you would not repay the mortgage. To do so, the underwriter evaluates factors that help the lender understand your financial situation, including:

  • Your credit score
  • Your credit report
  • The property you intend to buy

The underwriter then documents their assessments and weigh various elements of your loan application as a whole when deciding whether they think the risk level is acceptable.

Here’s an example from Fannie Mae’s underwriting guidelines. Say a given lender typically requires the following to approve a mortgage:

  • Maximum loan-to-value (LTV) ratio of 95 percent
  • Credit score of 680 or higher
  • Maximum debt-to-income (DTI) ratio of 36 percent

But if an applicant falls short in one area, the loan might still be approved based on the strength of certain factors, including:

  • LTV ratio
  • Credit score
  • Whether you will occupy the property
  • Amortization schedule
  • Type of property and how many units it has
  • DTI ratio
  • Financial reserves

So, if you had a worse DTI — say 40 percent — you might get approved for a mortgage as long as you had a better credit score. Or, if your LTV ratio was better than 75 percent, you might be able to get mortgage approval even with a lower credit score, as low as 620.

How long does mortgage underwriting take?

The mortgage underwriting process can take anywhere from a few days to a few weeks, depending on whether the underwriter needs additional information from the borrower, what demand is like for the lender and how streamlined the lender’s practices are.

Keep in mind, however, that underwriting is just one part of the overall lending process. You can expect to completely close on a loan in 40-50 days.

Applying for a mortgage: What to expect

When you submit a mortgage application to a lender, you’ll need to include extensive financial documentation, such as W-2 forms, pay stubs, bank statements and tax returns. When underwriting the application, the lender may come back to you with questions about these documents or requests for additional information. Responding to these requests quickly will help speed up the mortgage underwriting process.

Here’s an overview of the steps to getting a mortgage:

1. Get prequalified

YYour very first step — even before you start looking for a house — should be to get prequalified for a loan. A lender will review your basic financial information, such as your income and your debts, and run a credit check. Getting prequalified will help you determine what kind of mortgage fits your budget.

Check your credit score for free with Bankrate before you get prequalified.

2. Income verification

Be prepared to have your income verified and provide other financial documentation such as tax returns and bank account statements. Your lender will confirm your information, and, if you’re deemed qualified, will issue a preapproval letter stating that it is willing to lend you a certain amount based on the information you provided. A preapproval letter shows the seller that you’re a serious buyer and can back a purchase offer with financing.

Use Bankrate’s mortgage calculator to figure out how much you need.

3. Appraisal

Once you’ve found a house you like that fits your budget and have made an offer on it, a lender will conduct an appraisal of the property. This is to assess whether the amount you offered to pay is appropriate based on the house’s condition and comparable homes in the neighborhood. The cost of the appraisal will vary from a few hundred dollars to over a thousand, depending on the complexity and size of the home.

4. Title search and title insurance

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 history of the property, looking for mortgages, claims, liens, easement rights, zoning ordinances, pending legal action, unpaid taxes and restrictive covenants. 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 and one to protect the property owner.

5. The underwriting decision: approved, denied, suspended — or approved with conditions

Once the underwriter thoroughly reviews your application, the best outcome is that you are approved for a mortgage. That gives you the all-clear to proceed to closing on the property.

However, you might receive one of these decisions:

  • Denied: If your mortgage application is denied, you’ll need to understand the specific reason for the denial to determine your next steps.If the lender thinks you have too much debt, you might be able to lower your DTI ratio by paying down credit card balances. Perhaps your credit score didn’t make the cut. Recheck your credit report for mistakes and take steps to improve your credit score. Possibly you could apply again in a few months, apply for a smaller loan amount or try to assemble a larger down payment.
  • Suspended: This might mean some documentation is missing from your file so the underwriter can’t evaluate it. Your application could be suspended if, for example, the underwriter couldn’t verify your employment or income. The lender should tell you whether you can reactivate your application by providing additional information.
  • Approved with conditions: Mortgage approvals can come with conditions such as: additional pay stubs, tax forms, proof of mortgage insurance, proof of insurance, copies of marriage certificates or divorce decrees or copies of business licenses.

Once you clear any conditions and get your mortgage approved, your home purchase is almost complete. The final step is closing day, which is when the lender funds your loan and pays the selling party in exchange for the title to the property. This is when you’ll sign the final paperwork, settle any closing costs that are due and receive the keys to your new home.

Tips for a smooth mortgage underwriting process

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. If you have to request paperwork from a specific account holder, for instance, do so as soon as possible.

It can be smart to put together a file that includes the following:

  • Employment information from the past two years (if you’re self-employed, this includes business records and tax returns)
    W-2s from the past two years
  • Pay stubs from at least 30-60 days prior to when you apply
  • Account information, including checking, savings or money market accounts, CDs and retirement
  • Additional income information, such as alimony or child support, annuities, bonuses or commissions, dividends, overtime, a pension or Social Security

In addition, if you plan to use gifted funds for a down payment, it’s important to have those funds in your possession (in other words, in an account in your name) well before you apply. You’ll also need to have a gift letter to verify that the money is indeed a gift. Doing both can help you avoid unnecessary setbacks in underwriting.

Getting started

If you’re looking to get a mortgage and have all of your documents in order, you’re ready to start comparing loan offers. Ideally, you’ll want to find the loan with the lowest interest rate and fees and the most favorable terms.

As you shop around, consider what type of loan will suit your situation — some mortgages are better for lower-income borrowers, for instance, or those with poorer credit — in addition to how long you plan to stay in the home and what you can reasonably afford.

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