You submit your application for a mortgage on your dream home and a few days later your lender calls and says the loan has been approved. Before you crack open the champagne, you should realize that the underwriting process does not actually finish until you sign on the dotted line. The lender makes the initial approval based upon the information you provided on your application. Consequently, a lot can go wrong between the approval and the closing date. Once the loan is approved, you'll have plenty of time to celebrate.
The Appraisal Process
Lenders base initial loan approvals on the stated value of the home on the mortgage application. If you are buying a new home, the lender initially assumes that the sale price represents the property's fair market value. However, instead of taking your word for it, the lender orders a full home appraisal. This inspection is often factored into the loan underwriting timeline, which can seem longer until you realize setting up and performing an appraisal takes time.
During the inspection part of the loan underwriting process, a licensed inspector values the home based either on the cost of replacing it or comparing it with similar homes that have recently sold. A low appraisal could kill the deal unless the seller agrees to drop the price. Once the loan is approved, the appraisal normally occurs a week or two later. The underwriter can change the status from approved to declined based upon the appraisal.
Conducting a Title Search
The seller's name appears on the warranty deed so you feel sure that you are buying the home from the rightful owner. However, issues relating to previously unpaid liens or improperly filed quit claim deeds sometimes mean that other parties have a legal claim on a home. This can put an unwelcome snag in the underwriting process.
After the loan is approved, the lender pays a title company to scour the court records and ensure that there are no unpaid liens on the house. In many instances, the title company does not complete its report until a few days before the loan closing. An unpaid tax lien or mortgage could derail the whole loan process. If no liens are found, the lender acquires a title insurance policy from the title company. This means the title company must compensate you and the lender if title issues emerge further down the line.
Income Verification Requirements
You normally provide your lender with income verification such as pay stubs and tax returns at the time of application. However, employment arrangements can change pretty quickly, so on first lien mortgages your lender directly contacts your employer to ensure that you are still employed. This can affect your loan underwriting timeline, particularly if you or your co-signer have a change in employment during the time period.
As for the nature of these checks, it can vary based on each lender's underwriting process. Some do this twice, once at the time of application and again just before the loan closes. A lender may check to see if you are still employed on the day of the loan closing. Additionally, the lender can check your credit report for a second time if the mortgage process lasts longer than 45 days. For this reason, it's important to delay celebrating once the loan is approved. Deteriorating credit scores and job losses can cause the lender to cancel the loan even on the day of closing.
Making It to Closing
The final stop on the loan underwriting timeline is closing. If the appraisal, title search and the other verification processes go to plan, the lender instructs a third party such as a title company or attorney to arrange the loan closing. The closer prepares the HUD1 statement that details all of the loan costs that are paid by you, the lender and the seller. These include the funds you must pay into escrow such as your homeowners insurance premium and property taxes.
Before closing, you have the opportunity to review the HUD1 for accuracy prior, although this sometimes occurs just a few minutes before you are due to sign. If everything looks good, you sign the loan documents and the closer disburses funds to the lender, the seller and the company that holds your escrow.