Every mortgage applicant must go through underwriting before final approval. Learn what it is, the steps in the process, and how long it takes.
Mortgage lenders take a risk when they loan money to homebuyers. Both buyers and lenders have ways of assessing how much of a risk something will be. Buyers can hire inspectors and others to help them evaluate a property’s health. Mortgage lenders use a process known as underwriting to evaluate a loan applicant’s creditworthiness.
Some underwriting standards apply across the board to certain types of mortgages, such as regulations for conventional mortgages from Fannie Mae and Freddie Mac. Each lender may also have its own underwriting guidelines.
What is a mortgage underwriter and what do they do?
An underwriter is a person with financial expertise who provides risk assessments. Underwriting is common in industries where financial risk management is a core concern, such as lending, insurance, and various types of securities.
In mortgage lending, an underwriter’s job is to evaluate a loan applicant’s credit history and current financial situation. They will perform an extensive review to determine how much of a risk it would be to lend money to a particular applicant. If a loan applicant meets the lender’s underwriting guidelines, the underwriter will approve them for a mortgage.
Automated underwriting, in which a computer algorithm performs some or all of the steps in the process, is becoming more common. It tends to be faster than manual underwriting, but it has limitations. A software application does not have a human underwriter’s ability to take unique or unusual circumstances into account.
How long does mortgage underwriting take?
For a simple mortgage application - in which the borrower has submitted all supporting documents, works an easily-documentable job, and without complicating co-signers - expect underwriting to take a week or less.
Each loan application presents unique circumstances, so it’s impossible to provide a one-size-fits-all estimate of how long the underwriting process will take. It could be a few days or a few weeks. Some factors that could affect the length of the process are within a borrower’s control, such as whether they provide enough information and documents, and whether they respond to requests for additional materials in a timely manner. Other factors that may affect the process include the volume of the underwriter’s workload and the complexity of their underwriting process.
What are the steps in the underwriting process?
The underwriting process consists of multiple steps. Underwriters must follow guidelines for various loan programs, such as loans backed by the Federal Housing Administration (FHA). Each lender might have its own specific system.
The following is just a general overview of how an underwriter evaluates a loan applicant. This is what happens when a mortgage goes to underwriting.
Pre-approval for a mortgage means that your credit, income, and other financial information meet the requirements for a mortgage loan. You haven’t found the home you want to buy yet, but a lender has stated that it will loan you up to a certain amount of money as long as your financial situation does not change.
» READ MORE: What NOT to do After Mortgage Pre-Approval
Verification of Employment, Assets, etc.
The underwriter will look at information such as:
Current employment and income
Assets and savings, including your ability to make the down payment
Evaluation of Credit History and DTI
The underwriter will look at your credit score, credit history, and debt-to-income (DTI) ratio to see if they meet various guidelines.
A lender may have its own guidelines for conventional loans, or it may follow guidelines set by Fannie Mae and Freddie Mac. For loans backed by the FHA, U.S. Department of Veterans Affairs (VA), or U.S. Department of Agriculture (USDA), the underwriter must follow those agencies’ guidelines.
» READ MORE: How Much Debt Can I Have When Buying a House?
Appraisal of the Home
Once you have made an offer on a home, the lender will appraise the property to determine whether its value justifies the sales price and the loan amount. The appraisal will look at the condition of the home and the value of comparable properties in the area. The underwriter will determine whether the loan-to-value (LTV) ratio meets the applicable guidelines.
» READ MORE: The Home Appraisal Process: What You Need to Know
Mortgage lenders in Texas require title insurance, which covers claims of ownership or other interests in the property by third parties. If someone else claims to own all or part of the property, for example. it affects the lender’s lien on the home.
A title company can conduct a search of the property’s title history. They will issue a title commitment indicating any defects or other issues with the title. The underwriter will determine whether any potential title claims pose too much of a risk.
Once the underwriter has completed their review, they will make a decision and notify you of the outcome. Possible decisions include:
Approval: Your loan application is approved, and you may proceed to closing.
Approval with conditions: You are approved for a mortgage as long as you provide certain information or meet other conditions specified by the underwriter.
Denial: The underwriter will provide specific reasons for denying your application, such as a DTI ratio that is too high or a credit score that is too low. You might be able to remedy the problem(s) and reapply for a loan.
Suspension: The underwriter might not be able to make a final decision until they receive more information. They could suspend your application until you are able to provide the information they need.
Simplify and de-stress the mortgage process with us!
The process of buying a home can be quite stressful, especially when you’re applying for financing with a lender treating you like a loan number. The experienced mortgage advisors at The Wood Group of Fairway are not only super knowledgeable, they also treat you like a real person making a huge decision - and that’s exactly who you are! Get started on your free pre-approval today by answering a few easy questions.