The bank, credit union or lender has to determine whether you are likely to be able to pay back the home loan before deciding whether to approve your mortgage application , and does this through underwriting.
Before underwriting, 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. 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 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, too, lenders use a combination of automated and manual underwriting in order to gauge risk.
To do so, the underwriter evaluates factors that help the lender understand your financial situation, including:. The underwriter then documents their assessments and weighs various elements of your loan application as a whole to decide whether the risk level is acceptable. So, if you had a higher DTI — say 40 percent — you might get approved for a mortgage as long as you have a better credit score. If your LTV ratio was lower than 97 percent, you might be able to get mortgage approval even with a lower credit score, like 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 days. In , 9. For conventional loans, lenders adhere to Fannie Mae and Freddie Mac standards, because if a loan meets those requirements, the lender can sell it on the secondary market and use that capital to create more mortgages for more borrowers. Sometimes, lenders implement stricter protocols in response to economic volatility.
Throughout the pandemic, for example, many lenders began requiring higher credit scores and larger down payments. That said, some lenders can be flexible, such as allowing a borrower to qualify based on assets instead of income. When underwriting the application, the lender might 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.
Your very first step — even before you start looking for a home — is to get preapproved for a mortgage. Keep in mind that getting prequalified and getting preapproved mean two different things. A prequalification is simply an indication you could be approved for a loan. Obtaining a preapproval usually requires you to furnish more information to the lender compared to a prequalification.
Be prepared to have your income verified and provide other financial documentation, such as tax returns and bank account statements. Assets that will be considered include money in your bank accounts, retirement savings, your investment accounts, the cash value of your life insurance policies and ownerships in business where you have assets in the form of stock or retirement accounts. The cost of an appraisal for a single-family home varies from a few hundred dollars to over a thousand, depending on the complexity and size of the home.
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 this is almost always required and one to protect the property owner optional, but can be worth getting.
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. 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.
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 institution, for instance, do so as soon as possible.
The decision can take a while, including up to 60 days, depending on other factors. If there are contingencies on the purchase agreement, such as loan approval or a home inspection, these all need to be cleared before closing.
Depending on the timeline, it can take one to two weeks or longer to clear contingencies. As long as everything is in place, you can expect to close on the home within two months from the date of your purchase agreement. The average time it took to close on a home purchase in August was 45 days, according to a report by mortgage technology company Ellie Mae. The actual closing only takes a couple of hours if all of the paperwork is in order and escrow can be verified.
When going through the mortgage underwriting process, you can make sure things happen as quickly and smoothly as possible by:. Credible makes comparing multiple lenders quick and easy — you can see your rates from our partner lenders in the table below in three minutes. Mortgage Refinance , Mortgages. Advertiser Disclosure. What to expect during the underwriting process How long does underwriting take?
Steps of the underwriting process Tips for the underwriting stage What is mortgage underwriting? With all of this information in hand, a lender issues one of these decisions: Approval: The loan ultimately goes through and the funds are disbursed at closing and provided to the seller.
The lender has to provide you with the reason for the denial. You might be able to fix the problem and get an approval later. For example, if your DTI is too high, you might be able to pay down a loan and then receive approval. Usually, the lender will let you know how to proceed so you can get the right information and re-activate your loan application. Credible makes getting a mortgage easy Instant streamlined pre-approval: It only takes 3 minutes to see if you qualify for an instant streamlined pre-approval letter, without affecting your credit.
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Talk to a loan officer only if you want to. Having a preapproval letter can increase your chances of getting an offer approved quickly. It makes you stand out as a serious buyer since you're more likely to lock in financing. If your offer is accepted, the lender will order an appraisal of the property. The appraisal helps determine the fair market value of a home and ensures the mortgage amount does not exceed the home's value. It's designed primarily to protect the lender, but it can also protect you from overspending on a house.
If the appraisal comes in for less than the asking price, you may need to search for an alternative property. Typically, the lender will not approve a home loan that exceeds the appraisal value. Sometimes, if a home appraisal comes in low, the seller will lower the asking price. Just be aware that you may have to walk away from a home that doesn't appraise as expected.
If the appraisal is in line with your offer and the loan amount, the lender will authorize a title search. The title company researches the property's history and ensures no claims exist on the property, such as a current mortgage or lien, pending legal action, restrictions or unpaid taxes.
After the search, the title company issues a title insurance policy guaranteeing the search accuracy. Two title policies may be issued: one to protect the lender and sometimes, a separate policy to protect the buyer. Once all of the above steps are complete and your application is thoroughly reviewed, the underwriter will issue a judgment. Here are the most common underwriting decisions:. The typical underwriting process ranges from a couple of days to several weeks-- though the entire closing process usually takes 45 days.
To make sure the process goes smoothly and quickly, respond promptly to any lender requests for information and give a heads up to any references you list such as an employer so they will be prepared.
Many lenders allow you to check the status of the underwriting process online, so you can be proactive if any documentation is missing. Make a larger down payment: The larger your down payment , the better your chances of getting approved for a mortgage loan.
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