Quick Guide to Mortgage Underwriting
Embarking on a house hunting process can be a daunting task all on its own, but obtaining a mortgage to finance a purchase is another obstacle to tackle.
The process of mortgage credit underwriting is certainly a complex one due to the amount of due diligence needed on the part of the lender in loaning out a large amount of money to a borrower. Lenders want to be certain that borrowers are capable of paying back the money loaned in order to finance a property purchase. While many homebuyers qualify for a home loan with flying colors, others may find getting approved much more challenging.
Here we’ll discuss the process of mortgage underwriting to help you better understand what’s expected of you in order to get approved for a home loan.
What is Mortgage Underwriting?
Essentially, mortgage underwriting is what lenders use to determine whether or not a certain borrower is eligible for a home loan. If you approach a bank for a mortgage, an in-depth analysis of your credit history and financial background will be conducted before you are approved (or rejected) for a home loan. This is all done to determine the odds of you being capable of making regular mortgage payments on time and in full each month without going into default.
The process of mortgage underwriting has a number of steps before a decision is made about whether to approve or deny a mortgage. Lenders will follow certain criteria to establish the level of risk associated with offering a mortgage loan to a specific borrower.
How Does Mortgage Underwriting Work?
There’s a lot that goes on in the mortgage underwrite process, and it all starts with the underwriter verifying the information you’ve provided on your application. Factors such as your income, combined debts, and past history of borrowing will be looked at. The underwriting team will call your employer to confirm that you work there and what your income is, for instance.
A copy of your credit report will be looked at to identify what your credit score is. Borrowers with low credit scores will often have a much harder time getting approved for a mortgage, as they are considered to be much riskier borrowers that place lenders at increased risk.
The home that you want to purchase with the loan will also be looked at in order to make sure that the property offers sufficient collateral for the loan. They’ll also want to ensure that the property is worth the amount you agreed to pay for it. As such, a professional appraiser will be sent out to the property to assess the current market value of the property.
Once the appraisal has been conducted, the legal history of the property’s title will be looked at by a title company. If there are any issues with title - such as liens or claims - the lender may be less willing to extend a loan until such issues have been cleared up. A title insurer will then issue an insurance policy that guarantees the work’s accuracy. Lenders will require this policy to be in place to protect both the property owner and the lender.
What Types of Issues Can Arise Throughout the Underwriting Process?
Throughout the mortgage underwriting process, a number of snags can be met that could affect whether or not you are approved for a mortgage.
For starters, if you’ve got too much debt relative to your income, your mortgage may be denied. The amount of debt that you carry compared to the income you have available is referred to as a debt-to-income ratio. If this ratio is too high, your lender may feel that you will be incapable of having enough money to put towards paying your mortgage, as you’ve already got other debt obligations to fulfill. In fact, it’s this debt-to-income ratio that is one of the most important factors in the mortgage underwriting process.
A low credit score could also play a role in deterring an approved mortgage application. Most home loans are for fairly large amounts. If you have a bad history of not repaying money borrowed from previous lenders, mortgage underwriters will undoubtedly discover such a fact. Depending on the type of mortgage that is being applied for, you may be denied an approval if your credit score is deemed too low.
As stated above, an appraisal will need to take place in order for the lender to establish whether or not the home is worth what you're paying for it based on current market conditions and similar properties in the area that have recently sold. If the appraisal comes in low, the results could affect whether or not you are approved for a mortgage, as well as the interest rate and terms that you’ll be offered.
Lenders want to make sure that they are not extending loans that are much more than the real value of the property. In the event that a loan defaults, lenders need to be certain that they’ll be able to sell the home and recoup all of the funds loaned out.
How Long Does This Process Take?
The answer to this will depend on a number of factors, including the specific underwriter’s performance. A more experienced underwriter will obviously be able to carry out the process faster than a novice. The number of applications that a specific mortgage firm must handle will also play a role in how long the process will take to complete. Complicated factors on the part of the borrower can complicate the process as well.
The time it takes to complete the mortgage underwriting process can vary greatly, but generally speaking, it typically ranges between two days to two weeks from the moment the underwriter receives your application to the moment you are either approved or denied by your lender.
How Does Mortgage Underwriting Affect My Finances?
It’s recommended that during the underwriting process, you shouldn’t make any large purchases on credit. This includes buying a car that will entail an auto loan, and other purchases like it. That’s because you’re incurring more debt, which will have a direct impact on your debt-to-income ratio.
You should also not make any sudden changes in your professional career, such as switching jobs or quitting your full-time job to pursue self-employment. Big changes like these can have a significant impact on your financials, which can negatively affect your lender’s willingness to extend a home loan.