The underwriting process is often a dark cloud over the real estate loan process. Many homebuyers hold their breath in anticipation of the underwriting results and feel powerless about the outcome.
While a critical part of buying a home, the mortgage underwriting process does not need to be scary or make you feel powerless. Here are a few things you need to know about underwriting and what you can do to help it along.
What is underwriting?
Before we dive headlong into how you can move the underwriting process along, we need to get a few FAQ out of the way. The first one being what underwriting actually is.
Underwriting is the process a mortgage lender goes through to ensure the loan they are taking on is worth the risk. During this process, an underwriter determines if you qualify to receive the loan you are applying for. The qualifications depend on which of the loan programs you are using, but many lenders try and structure their conforming loans to the Fannie Mae and Freddie Mac standards.
What do underwriters look for?
The underwriter is basically looking for any discrepancies in your financial history. They’ll take a look at bank statements and tax returns, dive into whether or not you have bankruptcies or late payments on your credit report, and analyze how high your debt-to-income ratio is.
Automated Underwriting System vs. Manual Underwriting
There are two types of underwriting: automated and manual underwriting.
Most lenders in the US use the Automated Underwriting System (AUS) when verifying loans. This helps them go through large quantities of loans without needing to have eyes on each one.
The AUS is especially helpful for loans that have strict yes or no guidelines, such as FHA loans. FHA loans have a hard and fast rule that they don’t loan to anyone who has certain credit scores. Although the FHA loan has stricter guidelines than other loans, the lender will often have rules of their own on top of the set guidelines to minimize their risk.
There are times the AUS just isn’t able to do its job well enough. Situations where it is complicated to verify income or there is more of an explanation needed on a deposit in an account are good examples of a loan application that would go to the manual underwriting process.
In a loan approval process where there is manual underwriting needed, the process can take a bit longer. While underwriting typically takes anywhere from 5-8 business days, if your home loan application goes to manual underwriting, it usually means they need more information from you. The timeline to get the loan processed then depends on your cooperation, as well as theirs.
What does an underwriter need from a buyer?
Your loan officer is in charge of gathering everything for the underwriter. They’ll create a file that they’ll pass over to the underwriter to get you approved for the loan amount you are asking for. Here is a list of things that your loan officer will probably ask for:
- Pay stubs from last two months of employment to prove you have a job that pays you enough for you to pay your bills
- W-2 forms or tax returns for the last 2 years (if you are self-employed or on a commission job) to prove you have been consistent at making an adequate amount of money
- Three months of bank statements (from checking and savings accounts) to verify your assets and analyze your income for any suspicious activity (such as payment or collection on an unofficial loan)
- Property appraisal to make sure the home loan amount is backed by the value of the home
- Title search and insurance information to make sure there are no liens against the house
- Property survey to make sure you have the boundaries of the property properly mapped out
The Underwriting Process
The complete underwriting process begins when you find a lender. Typically, serious buyers go to a lender before they put an offer in on a piece of real estate to make sure they can afford the houses they are looking at.
When you go to a lender for the first time, they’ll probably prequalify you quickly with information that you give them. If you choose to work with them, they’ll often pre-approve you for a loan.
During this process, they’ll run your credit history and look at your bank statements to make sure the information they have on you is accurate. If it is and you qualify for a loan based on that information, they’ll give you a pre-approval letter.
Once you put an offer in on a house, the lender will send out an appraiser to take a look at the property and analyze its value based on the condition of the house and comps in the area. Your lender will also ask that you supply all of the documents we listed above.
While gathering up all of these documents and having strangers pry their way into your personal financial life is uncomfortable, you should not take any of it personally. They are trying to protect their assets as much as you want to protect yours. It is in your best interest to cooperate with them as much as possible.
Once all of the documents have been compiled and the house appraised, the loan officer will send the file off to the underwriter for their approval. Once the underwriter reviews your file, they will give you one of three statuses:
Clear to Close
You are good to go! You may now proceed to the closing date.
Approved with Conditions
It looks good so far, but they still need a bit of info from you before you are approved.
Try again when your situation improves. They will typically give you a reason why your loan was denied, such as low credit, high debt-to-income ratio, etc.
Once you are clear to close, that means your loan has gone through and you can now sign the papers for the sale.
How to Make the Underwriting Process Go Faster
The speed of the underwriting process has a lot to do with the underwriter themselves, but that doesn’t mean your hands are tied. There are several things you can do on your end to speed up the process and get the Clear to Close status you’ve been waiting for!
Repair Credit Before Applying
Have an iffy credit score? You can bet that anything below 640 is going to get some major scrutiny, so try to bring it up as much as you can before you apply for a loan. While there are companies that promise to clean your credit for you, try paying off your debts and disputing any charges that have already been resolved before spending more money on a company.
Analyze Debt-to-Income Ratio
It’s fairly easy to compute your debt to income (DTI) ratio (total debt/income=debt-to-income ratio). Lenders like to see a DTIs lower than 72%, so make sure yours falls below that. If you make an income that isn’t conventional (such as a consultant or part of an MLM) it might be more difficult to verify. Assemble as much documentation on your income as you can. Too much information is always better than not enough with the underwriting process.
Supply a Healthy Down Payment
If you know the underwriting process is going to be a bit stickier for you, consider putting down a significant down payment. A larger down payment shows the lender that you are willing to put more skin in the game and increases a level of trust. While it won’t get you the loan if your paperwork clearly shows you aren’t qualified, it could push the odds in your favor if you don’t have much credit history or have a bankruptcy in your past.
See, that wasn’t too bad, was it? The underwriting process is really the major event that you need to pass before closing on a house with a loan. While it can be daunting, don’t forget to supply the necessary paperwork, do what you can to boost your chances of qualifying, and participate fully during the process. Soon enough, you’ll hear the words you’ve been waiting for: Clear to Close!
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