How Does the Mortgage Underwriting Process Work?

Key takeaways

-Before applying for a mortgage, complete the pre-approval process with your preferred lender. This process proceeds much like the loan underwriting process.

-Create a folder that collects all important documents in one place. These include your W-2s, employment verification forms, loan statements and tax returns. Request any documents needed from others.

-Prepare to improve your credit score if necessary. Months (or even a year) before applying for a mortgage, access and review your credit reports to determine areas for improvement, and to begin paying down credit cards.

Like most American homebuyers, you will likely finance your home with a mortgage. Banks, credit unions and other lenders perform a mortgage underwriting process to evaluate loan applications.

Lenders use the mortgage underwriting process to determine the borrower’s risk. This process includes a review of creditworthiness (credit score and credit history), verification of income and employment information, and assessment of financial data.

Applying for a home loan is stressful. You can take proactive steps to prepare and ensure the process runs smoothly.

The mortgage underwriting process

A mortgage lender won’t approve a loan for every applicant.

The lender’s mortgage broker, or underwriter, will conduct an extensive review of every application to determine the risk that the applicant will default, or fail to repay, the loan. This review includes a credit check, financial account review (investments, bank accounts, savings), identity check, and employment and income verification.

From these documents, the underwriter discerns whether you meet three criteria: (1) minimum credit score, (2) preferred debt-to-income (DTI) ratio, and (3) maximum loan-to-value (LTV) ratio. Most lenders assess these criteria within guidelines set by Fannie Mae. For a single-family home serving as a primary residence, these are:

• Minimum credit score of 640

• Maximum DTI of 36%

-Maximum LTV ratio of 97%

Just because you fail to meet one criterion doesn’t necessarily mean that your application is doomed. Instead, the mortgage broker may also consider other factors such as:

• The loan’s amortization schedule

• The type of property and number of units

• Your financial reserves and assets

• Whether you’ll live at the property

Similarly, if your credit score is lower than 640, but you plan to make a 20% down payment, your LTV ratio would be only 80%. This makes you a more attractive prospect for the lender because you have more “skin in the game” on the property.

After reviewing your application, the underwriter will record their assessment, and weigh each piece of your application to make a decision. Some underwriters perform this assessment manually, while others use an automated computer program. For applicants with unusual circumstances, a manual review may be better because of the human touch of an actual underwriter.

Steps in the underwriting process

Completing a home mortgage loan application process is time-consuming and can be stressful. There are steps you can take to make it easier.

1. Getting pre-approved

Before you even begin looking for a home, get pre-approved for a mortgage. Much like the underwriting process, lenders will review your financial information (income and debts) and run a credit check.

Note that pre-approval is not the same as pre-qualification. In the latter, the lender simply indicates that you could be approved for a home loan. But with pre-approval, the lender is stating that you are approved for a certain amount of money.

2. Income and asset verification

Home mortgage underwriters will verify your income and assets before approving an application. This requires an extensive review of financial documentation, including:

• Tax returns

• Bank account statements

• Retirement savings statements

• Investment accounts

• The cash value of any life insurance policies

• Any ownership interests in a business in which you own stocks

If approved, the lender will issue a formal letter stating that you are approved up to a certain amount. This indicates to sellers that your purchase offer is legitimate and supported by financial backing.

3. Appraising your future home

After you’ve been pre-approved and the lender has reviewed your financials, it’s time to find your home. Once you have a property identified, the lender will conduct an appraisal to determine the home’s value.

The appraisal helps the lender determine whether the amount of money you offer on the home is appropriate. The lender will consider the appraised value in light of the home’s condition and comparable sales in the neighborhood.

Because the cost of an appraisal can range from a few hundred dollars to over a thousand, you’ll only want to do this once you’re sure you want to buy the property.

4. Title search and insurance

You don’t want to buy a property that other parties might claim – and a lender certainly doesn’t want to lend on such a home. A title company will search for the home’s title history to ensure that the deed can be property transferred. The search reviews the history for any:

• Other mortgages

• Legal claims

• Unpaid liens

• Easements or rights-of-way

• Zoning ordinances

• Unpaid taxes

• Restrictive covenants

You may also consider purchasing title insurance to protect the lender (almost always required) and to protect yourself.

5. Obtaining the underwriter’s decision

Of course, an outright approval is the best outcome. However, the lender may also issue a:

Denial: Learn the specific reasons and improve any areas for growth before reapplying.

Suspension: Provide any outstanding or missing documents as needed.

Conditional Approval: Satisfy any conditions imposed, such as providing further proof documents, copies of marriage certificates or divorce decrees, or any other requests.

Access home equity with Unlock Technologies

You can put any home equity to productive use when you have obtained a home and built up equity in it.

Through Unlock Technologies’ home equity agreement (HEA), you can receive a lump sum payment, based on the equity you have in your home, in exchange for a percentage of your home’s future value. Unlike a home equity loan or home equity line of credit, there are never any interest or installment payments because a HEA is not a loan.

Contact us today to get started.