Ready for a Loan? See What You Need to Know About Underwriting

What You Need to Know About Underwriting comes to mind when you have been pre-approved for a loan, you have found your dream home, and you have made an offer on it, what’s next?

The next and final stage in the mortgage application process is the “Underwriting process”.

As it has previously established, getting pre-approved for a loan is not a guarantee that you will eventually receive the needed funds. It only gives you an idea of how much financing you qualify for, and the interest rate that you will be charged.

The underwriting process is where the lender does a final and more thorough perusal of every personal and financial information that you’ve provided so far, combined with your credit history and DTI ratio, to determine whether you qualify for a loan or not.

This is the stage where the lender determines the risk of lending you money. Ready for a Loan? See What You Need to Know About Underwriting.

See What You Need to Know About Underwriting: What is Underwriting?

This is a process whereby a lender or an underwriter reviews all the information you have submitted for your loan application to determine whether you qualify for the amount that you are requesting.

Lenders use this process to evaluate the risk involved in loaning you money. This is where the lender tries to ensure that you are capable of making monthly payments towards servicing the loan.

What is Mortgage Underwriting?

This is the final stage of the mortgage application process. This is the stage where a mortgage underwriter takes a deeper look at all the personal and financial information that you provided during pre-approval and considers the value of the property that you need a loan to purchase, to determine whether lending you money is worth the risk or not.

The underwriter peruses your credit and DTI ratio to determine your ability to repay the loan if approved.

Who is an Underwriter?

This is the person who checks the borrower’s financial information and evaluates their willingness and ability to repay the loan. An underwriter reviews information such as the borrower’s employment, income, debts, and credit history to determine their ability to make monthly payments.

They usually render this service for a fee. They specialize in areas such as insurance, mortgages, and securities. There are different types of underwriters including Mortgage Underwriters, Insurance Underwriters, Equity Underwriters, and Debt Security Underwriters.

Who is a Mortgage Underwriter?

This is a financial professional who reviews a borrower’s loan application and finances to determine their ability to repay the mortgage. They verify all the information provided by the borrower and also ensure that the home that they want to purchase is worth the amount of mortgage financing that they are asking for.

Simply put, a mortgage underwriter determines whether the borrower’s mortgage application will be approved or not. They determine the level of risk that the lender will assume by loaning you money.

Steps Involved in the Mortgage Underwriting Process

1. Getting pre-approved: The first step towards making sure the underwriting process is successful is to get pre-approved. Although it isn’t part of the underwriting process itself, it is an important step that needs to be taken.

This step involves a lender evaluating your income, debt, assets, and credit history, to determine the amount they can lend you, your monthly payments, and the interest rate that will be charged on the loan.

Once you are pre-approved, you will get a pre-approval letter indicating that the lender agrees to loan you a particular amount. Presenting this letter to the seller shows that you will be able to fulfil any offer that you make.

2. Verification of income and asset: After you make an offer to the seller of your desired home and they accept it, the next step is to sign the purchase and sale agreement, and make an official application for a mortgage.

Most of the documents and information submitted for the pre-approval process will be needed again, except that the lender will do a tougher perusal of every one of them and probably ask for more. The lender will also verify income and assets.

3. Appraisal: Following the submission of your application, the lender will do an appraisal of the home that you want to buy to make sure it is worth the amount that you are applying to borrow to pay for it. The essence of this is to confirm that it can stand as enough collateral for the loan.

4. Title search and title insurance: After appraisal, a title company will carry out a title search to ensure that the home can be transferred. Two insurance policies will then be issued, one to protect the lender, and one for the owner of the property.

5. Underwriting decision: After a proper review of your application, your application will either be approved, denied, suspended, or you might be given conditional approval.

Types of Underwriting Decisions

The underwriter will make one of four decisions:

1. Approved: This is the decision that clears you to borrow the needed funds so you can go ahead to purchase your desired home.

2. Denied: This means for one reason or the other, the underwriter doesn’t think you deserve the loan. It is now up to you to inquire about the reason for the rejection so you can work on it and re-apply later.

If you were denied a loan due to a fall in your credit score, you will have to work on improving it, and if it is your DTI ratio that is too high, try settling some of your debts.

3. Suspended: This is when your application is placed on hold probably because some documents or vital information are missing, so the underwriter couldn’t make an evaluation. You will be required to provide the missing data or document before the underwriting can resume.

4. Conditional approval: This is when an underwriter approves you with a particular condition. It could just be that the lender needs you to submit another proof of insurance more pay stubs, or even a copy of your marriage certificate. Usually, once you fulfil the condition, your loan will be approved.

Tips for a Successful Mortgage Underwriting

1. Gather your documents: Take your time to compile all the necessary documents including your employment information, W-2s, pay stubs, investment accounts, and so on.

2. Work on your credit: A poor credit score can get your application rejected or even if you do get approved, might get you a loan with a ridiculously high interest rate.

This is why it is important to work on your credit by settling outstanding debts, not applying for new loans, and checking your credit report to ensure there is no inconsistency on it.

3. Don’t give false information: Ensure that every information that you give the underwriter is true. This is because all information provided will be verified, and if any of them turns out to be false, your mortgage application might get rejected.

4. Make a huge down payment: Putting down a massive down payment increases your chances of getting a mortgage approval, as it exposes the lender to less risk.

5. Use a mortgage broker: A mortgage broker can help you make the process go a lot smoother.

The Criteria for Mortgage Underwriting

During the underwriting process, the underwriter uses the following as a basis for evaluation:

1. Credit history: One of the criteria that an underwriter focuses on during the underwriting process is your credit history.

They check your credit history to get an understanding of how you usually handle your bills and debts. A low credit score will fetch you a mortgage with a high-interest rate or even get your application denied entirely.

2. Repayment capability: The underwriter also compares your existing debts against your income to determine your ability to repay the loan. If it turns out that other debts are already taking a large portion of your income, the underwriter might deny your application, as this signifies a possible inability to make monthly payments.

Other aspects of your finances will also be checked to make sure you have enough funds to cover your down payment and closing costs.

3. The value of the property: The final criterion is the worth of the home for which you are requesting mortgage financing. An appraisal will be carried out to determine the value of the home, and to be sure that it can stand as enough collateral for the loan.

Loan Officer Vs. Underwriter

Don’t mistake a loan officer for an underwriter, as both professionals have different functions that they perform in the loan application and approval process.

An underwriter is the one who receives your loan application, verifies your information, and decides whether you get the loan or not.

A loan officer, on the other hand, is the one who enlightens you about the different loan schemes and where you can get the best rates, retrieves your loan application, guides you on how to fill it appropriately, ensures you have all the required document and information, and keeps you updated on the status of your application.

Other Types of Underwriting

1. Credit Card Underwriting: This is a process whereby credit card companies carry out a thorough review of a credit card applicant’s credit history, income, and other factors to decide the credit limit and interest rate that they qualify for.

2. Commercial Real Estate Underwriting: This is a stage in the loan application process where a lender finds out the creditworthiness of businesses or investors who wish to get loans for commercial real estate properties. Some of the factors considered by lenders at this stage is the property’s income potential and the borrower’s financial stability.

3. Auto Loan Underwriting: This type of underwriting involves a lender evaluating a borrower’s credit history, income, job status, and the worth of the vehicle that they wish to purchase to determine whether they will get a loan or not.

4. Insurance Underwriting: This is a process whereby an underwriter assesses the risks associated with insuring people, businesses, or assets. Factors such as health, age, occupation, and property status are used to decide insurance premiums and coverage.

5. Business Loan Underwriting: Here, lenders evaluate the creditworthiness of businesses using their business plan, financial statements, credit history, and the personal credit and financial stability of the business owner to determine if they qualify for a loan.

Bottom Line:

Underwriting is a process whereby an underwriter reviews your personal and financial information to determine the risk of lending you money. It is the final stage in the mortgage application process and one of four decisions will be made by the lender.

After the review is done, your application will either be approved, denied, or suspended, or you might be given conditional approval.

Now that you are Ready for a Loan, See What You Need to Know About Underwriting.