For the applicant, the mortgage underwriting process never seems to happen fast enough. You want to know whether your application for a mortgage is approved as soon as possible, while the underwriter must check your creditworthiness, obtain the home appraisal and verify your income and overall financial stability. The entire process isn’t really finished until the day you close on your new house, which generally takes four to eight weeks from start to finish. But, generally, the underwriting is complete within 10 business days or less.
Mortgage underwriting begins after the prospective home buyer fills out their loan application and provides certain supporting documents, such as income verification, to their loan officer. That person then sends the documentation to the mortgage underwriter. The underwriter is the individual reviewing all of these documents, and it’s not uncommon that additional paperwork is required from the applicant.
The underwriter may work for your lender in-house or for a company the lender uses for this purpose. Check with your lender and find out how the underwriting process is handled through that bank or mortgage company. The underwriting process may differ depending on the lender, so you should ask for an explanation of how your lender handles it. Keep in mind, it’s unlikely you’ll ever meet the actual underwriter. The person determining whether or not you qualify for a mortgage will remain a stranger.
The Mortgage Underwriting Process
The mortgage underwriting process starts with the underwriter reviewing the applicant’s credit score, bank statements, W2 forms and tax returns. The underwriter delves into the borrower’s employment history, their debt to income ratio and other financial issues. If the borrowers are self-employed, they can expect to provide detailed information about their company and income.
Risk Assessment by the Mortgage Underwriter
Basically, the mortgage underwriter’s job comes down to assessing risk. The lender doesn’t want to get stuck with a property if the borrower can’t make their mortgage payments. Although lending standards were relatively loose prior to the 2008 housing crash, they have since tightened up considerably. Lenders don’t want a repeat of that era when they had to deal with countless foreclosures, some of them due to lax lending practices. For that reason, the underwriting process takes a little longer than it did before the housing crisis. Remember that patience is a virtue.
If you want to fast track the mortgage underwriting process, make sure your credit rating is stellar before you apply. That doesn’t just mean paying your bills on time. It also means paying off outstanding credit card debt. If you can’t pay your credit card balances in full, keep them as low as possible. Don’t apply for any new credit cards or lines of credit unless absolutely necessary. Underwriters don’t like to see high credit utilization rates, known colloquially as “maxing out” the cards. Keep your credit card utilization rate low, using at best only a third of your available credit. For example, if you have a credit card with a $15,000 limit, don’t have a balance exceeding $5,000. It’s also important to check your credit report regularly so you can correct any errors. You also want to guard against identify theft, which can wreak havoc on your credit score and other aspects of your life.
The underwriter examines your bank accounts, retirement savings and other assets to ensure that you can pay your mortgage, at least for a reasonable time, if you lose your job or suffer some other setback. Your debt to income ratio comes under particular scrutiny. That’s all of your monthly debt payments divided by your gross monthly income, as per the federal Consumer Financial Protection Bureau. You can figure this amount by adding up your gross monthly income, which includes the amount earned before deductions and taxes are taken out of your wages. Then, add up all your monthly debt payments, such as rent, car loans, student loans and average credit card bills, and divide that number by your gross monthly income. If your debt to income ratio is above 43 percent, you’ll likely have to work on reducing it before receiving mortgage loan approval.
The Mortgage Collateral
Then there’s the collateral involved in making the loan, which in this case is the dwelling. That’s why the home appraisal is so critical. A professional, independent appraiser will evaluate the home based on its condition and the sales prices of similar houses sold in the area recently. Those similar properties are known as comparables — or “comps.” The underwriter must verify that the property is worth the amount of money the applicant intends to borrow. No lender will loan a borrower more money than a house is worth. If you are planning to buy an investment property, rather than a home for your own use, expect even further scrutiny. Investment properties entail greater risk than a family home because a borrower is more likely to stop paying the mortgage or “walk away from,” such a property than the house they live in.
If a house appraises for less than the buyer agreed to pay the seller in the sales contract, it may prove just a bump in the road. The buyer can usually back out due to contingency clauses in the sales contract, but it’s often possible to renegotiate the contract based on the appraised value. Most sellers realize that a buyer can’t obtain a mortgage greater than the appraised value and will lower the price accordingly. However, the underwriting process stops at that point until a new sales contract with the lower price is drawn up and signed by both parties.
Additional Tasks for FHA Mortgages
If the applicant is applying for a mortgage from the U.S. Federal Housing Administration (FHA), the underwriter has additional tasks. This may extend the underwriting process by a few days or more. FHA home loan applicants must adhere to the regulations of the U.S. Department of Housing and Urban Development, which oversees the FHA mortgage program. The underwriter must ascertain that the applicant will live in the home as their primary residence as the FHA program does not provide financing for investment properties or second homes. The FHA also requires that borrowers have at least two already established credit cards or loans to qualify for a mortgage as such loans illustrate a payment history. Down payments are much lower for FHA mortgages than conventional mortgages, with some as low as 3.5 percent. If the down payment is a gift from another party, the FHA requires verification of this gift in writing from the person donating the funds. Unlike conventional mortgages, the FHA allows a debt to income ratio as high as 50 percent.
Aiding the Underwriting Process
There are ways you can speed up the mortgage underwriting process and they’re relatively simple. First and foremost, provide the underwriter with any documents requested as soon as possible. For example, the underwriter may want proof that the earnest money check for the escrow account has cleared. Get that information to them immediately. Keep careful records of the documents you have provided and take notes when you have conversations with your lender. Let employers or other parties the underwriter may contact know to expect a call. Contact your lender regularly to check on the status of your application, although that doesn’t mean becoming a nuisance. Your prompt compliance helps move the process along.
- Home Buying Institute: How Long Does the Mortgage Underwriting Process Take, on Average?
- Bankrate: 5 key steps in the mortgage underwriting process
- Pennymac: Explaining the Loan Process Part 4: Mortgage Underwriting
- Experian: How to Improve Your Credit Score
- Consumer Financial Protection Bureau: What is a debt-to-income ratio? Why is the 43% debt-to-income ratio important?
- Value Penguin: FHA Loan Guidelines for 2018
- When Does a Mortgage Approval Expire?
- How Credit Card Applications Work
- Do You Go to a Closing Meeting When You Refinance a Home Loan?
- How Quickly Does Data Get on a Credit Report?
- Does Bank Loan Pre-Approval Hurt Your Credit?
- Mortgage Qualification Process
- What Does a Conditionally Approved Bank Loan Mean?
- What Is Expected of Us if We Want to Refinance Our Home Loan?