When the seller accepts your offer on their home, you may start dreaming of barbecues on the back patio, cooking brunch on the weekends, or getting cozy for movie nights. However, there’s a big hurdle you must face before you can close on your new home and get the keys: the mortgage underwriting process.
“Mortgage underwriting is the process where the lender reviews the loan and supporting documents and decides whether to approve the loan,” says Benjamin Schandelson, a mortgage loan originator at MJS Financial LLC, a small mortgage brokerage in Boca Raton, Florida.
Industry professionals say knowing how the process works may help cut back on costly mistakes and missing paperwork that could delay or stop your mortgage approval.
Here’s what you need to know about the mortgage underwriting process to avoid unnecessary hiccups with your home loan:
- What Is Underwriting?
- What Does an Underwriter Do?
- How Long Does Underwriting Take?
- 5 Tips for a Smooth Underwriting Experience
- The Bottom Line
What Is Underwriting?
Mortgage underwriting measures the lender’s risk in allowing you to borrow money. It involves assessing whether your finances and the home you’re buying meet the rules for the mortgage you want. There are several types of mortgages, each with different eligibility requirements.
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“It is important for the homebuyer to work with the mortgage loan originator to determine which program works the best for them,” says Amber Smith, a mortgage loan originator at LYC Mortgage LLC in Westwood, Massachusetts.
The mortgage underwriting process happens after you’ve entered a purchase agreement with the seller and submitted a mortgage application. Your lender will send your paperwork to the mortgage underwriter, and once everything is approved, you may complete the homebuying process by closing on the house.
Getting final approval on your mortgage application is different from getting preapproved before you start shopping for homes. A mortgage preapproval letter shows sellers that you are more likely to get approved for a mortgage, but it doesn’t guarantee that you will qualify.
What Does an Underwriter Do?
The mortgage underwriter makes sure that you meet the eligibility requirements of your home loan and assesses your ability to repay it. This process helps the lender measure your risk as a borrower.
During the underwriting process, your mortgage underwriter reviews:
- Your assets: Generally, the more cash you have, the better. The underwriter checks your bank statements for enough funds to cover your down payment, closing costs, and more.
- Your income: They look for a steady flow of income that demonstrates you’ll be able to afford your monthly mortgage payment. Sources of income may include (but aren’t limited to) your salary, commissions, bonuses, tips, long-term disability income, self-employment income, Social Security, and more.
- Your credit profile: The underwriter examines your credit report and credit scores from Equifax, Experian, and TransUnion, the three credit bureaus. Some red flags in your profile may include no credit history, liabilities that you didn’t include on your mortgage application, or a lot of recent credit inquiries. Depending on the mortgage, there may also be minimum credit score requirements.
- Your debt-to-income ratio: To evaluate your ability to repay the loan, the underwriter compares your monthly debt payments to your monthly income. The resulting calculation is known as your debt-to-income ratio. This figure is important because different mortgages have varying maximum debt-to-income ratios.
- The home appraisal: A home appraisal determines the fair market value of a property. If the results show that the home is worth less than its purchase price, your lender may reduce how much you can borrow.
Manual underwriting vs. automated underwriting
There are two types of underwriting: manual underwriting and automated underwriting. The difference is manual underwriting requires an underwriter to review each page of your mortgage application by hand, whereas computer systems — like Desktop Underwriter for Fannie Mae mortgages — do the heavy lifting for automated underwriting.
The lender chooses automated underwriting or manual underwriting based on your circumstances. Smith says lenders may use automated underwriting to save time and process more applications at once. However, manual underwriting can be better for folks with unique situations, since it may consider details beyond the scope of automated underwriting.
“There is room for gray whereas the automated underwriting system is black and white,” she says.
How Long Does Underwriting Take?
The mortgage underwriting timeline can take up to 45 days from the purchase agreement to closing, according to Smith. One factor that may impact this timeline is the type of underwriting. She says automated underwriting can take minutes, but manual underwriting requires more time. The process may also trigger some questions from the underwriter.
“It is very important that the homebuyer responds to these questions quickly so that they may finish underwriting the loan,” Smith says.
Ultimately, the mortgage underwriting process will result in a conditional or contingent approval, suspension (when the underwriter has a bigger question about your application), or denial.
5 Tips for a Smooth Underwriting Experience
While there are plenty of things that could go wrong during the mortgage underwriting process, it’s better to focus on the things within your control. Following these five tips may improve your chances of having a smooth underwriting experience.
1. Don’t be afraid to ask questions
It’s easy to get overwhelmed by the mortgage underwriting process, especially when you’re receiving so much new information at once.
“Often, people in the mortgage industry will throw around terms that borrowers do not fully understand,” Smith says.
She suggests asking questions to your real estate agent or lender if you’re feeling confused about homebuying jargon or any steps in the underwriting process.
2. Be open with your agent and lender
If you think there may be issues with your underwriting paperwork, both Smith and Schandelson recommend being upfront and honest with your real estate agent and lender.
“Discrepancies in the loan application can break the deal,” Smith says.
Your lender may know the best way to handle potential problems that could delay or put a stop to your mortgage approval.
For example, if you’re struggling to find your divorce paperwork, Smith suggests telling your lender about the missing document as soon as possible. A divorce decree may include alimony or child support payments, and these details might impact your eligibility.
3. Provide up-to-date paperwork ASAP
The underwriting process may involve requests for additional paperwork, as you now know. Smith says you should treat these requests with a sense of urgency.
“Be prompt with returning requested documents and signing disclosures,” she says.
If you’re slow with the paperwork, you may encounter interest rate changes or closing date delays. It’s also important to make sure everything you submit is up to date.
“Many times, we have issues because the driver’s license is a month away from expiration or the paystubs are from two months ago,” Schandelson says.
4. Don’t make any big last-minute purchases
To avoid slowing down your loan approval, Smith says you shouldn’t make large purchases of any type during the underwriting process. A hard credit inquiry or increased credit card balance may decrease your credit score, which could result in a higher mortgage interest rate and more expensive monthly payments.
5. Be mindful of large cash deposits
Lenders will check your bank statements for any large deposits in the past two months. “Large” is defined as a single deposit of more than 50% of your qualifying monthly income for the mortgage, according to Fannie Mae.
Smith says large deposits must have documentation to prove that the money came from an acceptable source. For example, Freddie Mac guidelines state that funds from a family member must include a signed gift letter with the donor’s name and contact information, the gifted amount, and a note confirming that the money doesn’t have to be repaid.
The Bottom Line
The mortgage underwriting process is an important part of the homebuying process. Once the underwriter signs off, your lender will have the green light to offer you a home loan.
Although the underwriting process varies depending on the loan, you can help things run along smoothly by knowing what to expect and preparing for your lender’s requests. Your mortgage underwriting paperwork must be complete, up to date, and ready ASAP. If not, you could risk delaying your closing date — or worse, getting your mortgage application denied.