You’ve done everything right so far in the home buying process. You’ve gotten your loan pre-approval, toured homes, chosen the right one for your family, and made an airtight offer. The seller has accepted your offer, and you’re ready to take the keys and get started on your next big adventure. But…not so fast. Before you can close on your home, there’s one more step in the escrow process: underwriting.
For many buyers, underwriting seems like a black hole of red tape and waiting. Most of the underwriting process occurs behind the scenes, so it’s understandable that many buyers have no idea what actually happens. That’s where this guide to the underwriting process comes in.
What is underwriting?
Underwriting is the process of verifying a borrower’s finances before making a final loan determination. Just like you want to do your due diligence when choosing a lender, a lender wants to make sure they will be able to recoup their investment before issuing a loan. They do this through the underwriting process, which ensures that lenders don’t allow unqualified applicants to access money.
Underwriting is just a fancy way of saying that your lender wants to verify your information and make sure you’re ready to own a home. You’ll need to have a large reserve of patience and be ready to provide any additional information requested by the lending institution. But once the underwriting process is complete, you can head into closing with the confidence that you’ll be able to repay your mortgage.
What does an underwriter do?
The underwriter on your application acts a bit like a fact-checker. Their job is to evaluate the risk a borrower poses to a lender and make a determination as to whether a loan exceeds the lender’s risk tolerance. Underwriters work in a variety of industries including finance, insurance, and mortgage lending. An underwriter will ultimately decide whether to approve or reject a loan application.
Once a loan underwriter receives your paperwork, there are a few things they’ll do with your information.
The underwriter will investigate your credit history.
The underwriter pulls your credit report, confirms your credit score, checks for a history of late payments, defaults, bankruptcies, foreclosures, and other damaging marks. Underwriters are looking for a debt-to-income ratio of around or below 36%. The main purpose of this step is to ensure that you’re able to afford your loan payments. Additionally, the underwriter wants to see that you have a history of responsible spending.
The underwriter will seek an appraisal.
An appraisal ensures that the home you’re purchasing is worth what the bank is offering to pay. If the value of the house comes back below your offer, the lender can deny the loan.
If the lender refuses the loan based on the appraisal, you can offer to come up with the difference between the appraised value and your offer. Alternatively, you could ask the seller to take a reduced price equal to the appraised value of the home.
The underwriter will check your employment status and income.
The underwriter can contact your employer, review your tax returns, look at income statements, and check investment accounts. This step ensures that you’re making enough money to pay back your loan.
The underwriter will check your down payment and savings.
This step ensures that you have enough money set aside to cover your down payment and monthly expenses should you incur a job loss or other financial setback.
The underwriter will order a title search.
A title search ensures that a property cannot be claimed by someone else. For example, if the current owner has liens on the property (from failing to pay a debt or taxes), it could cause problems and delays during the closing process. As a buyer, you’re also entitled to know if the home you’re buying has liens. If there are no liens, the title company can transfer the title into your name at closing.
The underwriter will make a decision on your loan application.
When the underwriter finishes reviewing all of the loan documents and title information, they’ll decide whether or not to approve the loan. There are four possible outcomes.
- Denied. The lender refuses to lend you money for the property. Your lender is required to disclose the factors that led to their decision.
- Suspended. A suspension means that the underwriter couldn’t make a decision. This typically happens if you don’t turn in paperwork on time or the lender can’t verify income information. You may be able to reactivate the application if you can provide the necessary documentation.
- Approved with conditions. Your lender may approve your loan with conditions. Typically, this could mean they just want more information (insurance, additional pay stubs, business license, etc.).
- Approved. The loan is approved, and you’re ready to close.
Automated vs. manual underwriting
Depending on the lender you choose to work with, they may use an automated underwriting system or do a manual review of your application.
An automated underwriting process includes the use of specialized software to access and assess your financial records. It’s faster, but it has its limitations. Since automated underwriting systems operate on a computer program, there is little fluctuation in how they analyze information.
If you have mitigating circumstances, such as self-employment or other unique sources of income, you can request a manual review of your finances from your lender. If you have a solid credit history, healthy savings, and limited debt, however, an automated review of your finances will generally suffice.
Many lenders use a combination of automated underwriting and manual underwriting to speed up the process while ensuring customers get a personalized experience. If your loan is denied based on an automated underwriting process, some lenders may consider a manual reexamination of your application to look for ways to get your loan approved.
Here are a few of the most common questions borrowers have about underwriting.
How long does underwriting take?
The length of the underwriting process depends on the lender and can take anywhere from a few days to several weeks. Many things can cause delays in the underwriting process, including missing paperwork, a backup of other applications, title problems, or inspection and appraisal issues. Most buyers can close on their homes within 45 days of making an offer, but different circumstances can change the timeline.
What mistakes should I avoid during underwriting?
Once your loan application is complete, there are several things you’ll want to avoid to ensure there are no delays or other problems.
Don’t make purchases on credit cards. Increased balances can increase your debt-to-income ratio and monthly expenses, resulting in a lower credit score. A change of even a few points could mean a denial on your mortgage application.
Don’t take out additional loans. When you take out additional loans, the lender will run a hard credit check. Not only does a hard credit check affect your credit score, if you’re approved, but the total amount can also affect your debt to income ratio and how much money you have available to spend. Even the slightest change could push your application into the denial pile.
Don’t switch jobs. Ideally, you should stay at the same job and have no change in your income level. A change in income could mean that the lender thinks you’re unable to afford the loan.
Don’t lie to your lender. It seems like an obvious tip, but don’t lie about your income or your debt. Your lender will almost always find out.
Don’t ignore calls from your lender. If your lender or your real estate agent calls during the underwriting process, answer the phone. They may need additional information or paperwork. The faster you can provide the information, the faster your application will be processed.
Get Started with REX Home Loans
If you’re curious about your financing options, get in touch with REX. Like our real estate agents, REX home loan advisors don’t work on commission. Our goal is to help you find the best rates and terms for your mortgage, meaning there’s never any pressure to go with one lender versus another. We offer competitive rates from a variety of top lenders and significant savings on closing costs, all while bringing greater ease and transparency to the borrowing process.
So, if you’re currently shopping for a loan, or simply want a rate comparison, contact REX Home Loans for a free rate quote. We’d love to help you qualify for a mortgage and finance your next home.