Lenders determine whether a home buyer is credit-worthy through the underwriting process. Read on to find out what underwriters are looking for and how to get approved for a loan quickly.
Before you can get a loan to buy a house, you need to go through the underwriting process. Your lender is looking to check whether you have the ability to repay the loan that you're applying for. They also appraise the house to ensure that they can recoup their money in case you default on their loan.
Having a great real estate agent in your corner can help you get everything in order for the underwriting process. They'll make sure your offer is reasonable and won't be over the home's appraisal.
Here are a few important things you need to know about real estate underwriting and how to get approved for a mortgage.
What Is Real Estate Underwriting?
When a lender gives you a mortgage to buy a house, they assume a certain amount of uncertainty. The risk involved, as you'd imagine, is having a borrower become insolvent and stop making their monthly loan payments. The real estate underwriting process is a way for lenders to minimize the risk involved.
Mortgage underwriters start by collecting important documents to verify your identity and take stock of your financial situation. They will look at a variety of factors including the applicant's monthly income, employment history, financial assets, existing debts, and so on. Most major banks use software these days to assess risk using statistical models.
At the end of this process, the underwriter will determine whether or not you should get the loan you requested and what the interest rate should be.
How Mortgage Underwriters Assess an Applicant
Knowing that the mortgage underwriter is looking for signs that your ability to repay, there are certain measures that you can take to increase your credit-worthiness during the underwriting process.
Maintaining a healthy credit score is critical it if you're applying for a mortgage. You will, of course, have to meet a lender's minimum credit score requirements. But apart from that, applications who have a higher credit score are better positioned to negotiate a lower interest rate for the loan.
Another metric that underwriters look at is your debt-to-income ratio. If that ratio is high, it tells the underwriter that your pre-existing debt is high relative to what you earn. This can be a red flag. Home buyers should start paying off their other loans and maintain a low debt-to-income ratio before applying for a home loan.
A Clever Partner Agent will make your offer matches the appraised value.
Why Loan Underwriters Require a Property Appraisal
Mortgage underwriters assess part of the risk involved in giving a mortgage by looking at the applicant's financial situation. The other aspect they look at is the collateral to the loan, which is the house that you're attempting to buy. This is why banks require that you get a property appraisal done.
Your mortgage underwriter will ask you for the report prepared by the licensed appraiser hired to evaluate your property. This document will contain photos of the house and the amenities in it. Most importantly, the appraiser will include what they think is the monetary value of the house and how they reached that conclusion.
Mortgage underwriters use the appraisal as a benchmark for the loan. You are unlikely to get a loan amount that's a lot higher than the appraised value of the property. That's because banks know that they can recoup only what the property is actually worth and approve loans only around that amount.
How to Expedite Your Mortgage Underwriting Process
The first step to the mortgage underwriting process is providing all of the documents requested by the lender. Paystub copies, tax returns, insurance information, and bank statements are some of the documents that you will be asked for. Having all of these handy right at the beginning of the process can help move things along quickly.
It can also help to provide additional documents wherever possible. Some home buyers provide the minimum possible documentation. This gives the underwriter less information to work with to determine whether or not they should get the loan.
Another step to get through the underwriting process quickly is saving for a sizeable down payment. You're more likely to get approved if you're able to put down around 20% of the loan amount.
What Results Can I Expect from the Real Estate Underwriting Process
If your mortgage application comes back as “suspended,” that means you haven't provided the necessary documentation. You can reactivate your loan application by providing the documents that you didn't the first time.
If you get conditional approval for your mortgage application, then the underwriter is happy with what they see but need some extra documentation. They may ask you for a copy of your homeowners insurance or verification of your employment as a final step to get fully approved.
Having a mortgage application being denied means that you need to get to a better financial standing before you can get the loan you're looking for. This may mean having to pay down your credit card debt or improving your income before you can get the loan.
Working with a real estate agent can help you identify ways to enhance your mortgage application so it receives the ideal result: approval.
Clever Partner Agents can recommend lenders to home buyers so they can shop around for a loan and get one at a good rate.
Home buyers who get the loan they're looking for and complete the purchase of a home with a Partner Agent qualify for a $1,000 rebate in 40 states. Contact Clever to connect with a Clever Partner Agent who can help you through the mortgage process and buy a house at a good price.