What is Underwriting and How Does it Work?

Loan underwriting is one of the final steps before closing a real estate transaction. If you were pre-approved for a loan beforehand (hopefully you were), you have already seen a simplified version of loan underwriting. Here is how loan underwriting works.

What is underwriting?

Mortgage underwriting is the series of steps that a lender follows to decide if you qualify for the loan amount for a property. The loan officer from your bank, credit union, or broker will do a deep dive into your financial background to determine your eligibility and default risk. Because a home loan is a large sum of money, the lender wants to perform their due diligence.

What is the underwriting process?

The underwriting process takes time, usually 30 to 45 days, but for good reason. It is to ensure that the property is valued correctly and that you are able to pay back the loan the bank gives you. Here are the steps in the underwriting process:

Financial review

After you go under contract, an underwriter will verify your income, debt, and assets based on the documents they request you send them. This involves giving them the same documents you submitted during the pre-approval process, plus any other the lender may request. This is all to ensure that your income can support the monthly payments, as well as that you have the cash reserves for down payments and closing costs. The underwriter will look at employment and salary information (tax returns and recent pay stubs), bank statements, credit score and credit history, debt-to-income ratio, and property loan-to-value ratio.

If you have any marks on your credit history, you may have to provide documentation explaining them. The lender may also ask you for information about stocks and bonds, retirement accounts, or other real estate holdings to ensure your financial standing.

Property appraisal

In an appraisal, the home being purchased is valued against similar homes and properties in the area—similar to the Comparative Market Analysis (CMA) that your real estate agent used in order to price your old home to sell. The appraisal will give a fair market value of the home, which will be compared to the sale price that was agreed upon by the buyer and seller. Home appraisals rarely come in low, so there isn’t much to worry about. In addition, the appraisal cost is wrapped into the lender fees the buyer pays at closing and is handled by the lender, so there is no extra legwork on the buyer’s part.

Title search

The home’s title determines who has rights to the property. At this point, the underwriter will use a title company to perform a title search to see who has legal authority over the property. This protects the buyer in case a lost heir tries to claim the property, other mortgages, liens, easements, or other pending legal actions arise. You, as the buyer, have the option to purchase title insurance should one of these rare occurrences show up.

Final decision

There are four possible outcomes after the underwriting process:

  • Approval: Congratulations! Your loan has been approved and you are ready to close the deal
  • Denial: Loan denial at this late stage is rare, but usually arises from two factors. 1) The need for funding a larger down payment, or 2) changing the type of loan you are getting. However, denial doesn’t mean you are out of luck. Talk to your lender about steps to move toward approval.
  • Suspension: Your application is on hold due to missing information. This is often tied to missing income, employment, or other identifying information. Suspension can almost always be fixed by providing this information.
  • Conditional approval: This means that your financial information has been verified and approved, but the lender is waiting on proof of insurance, appraisal information, or title reports.

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