Underwriting is a process done by the mortgage lender. This process begins when you apply for a home loan. It helps the borrower show the lender that they can be trusted with the money they are borrowing. Underwriting has to happen in order for your loan application to be approved.
Typically, the underwriting process takes place after you sign a purchase agreement on a home, but it’s possible to get it done before you even start house hunting. Underwriting processes vary from region to region, and your real estate agent can advise you on local norms. In the Bay Area, our team at Willowmar advises our clients to get a fully underwritten preapproval. This gives them a competitive edge when they make an offer on a house because they already have a conditional mortgage approval. Sellers can be much more confident in a buyer with a fully underwritten preapproval.
In this article, we will cover the general underwriting process. This includes factors an underwriter considers when reviewing a loan application, potential outcomes of the process, additional documents that may be required, and an estimated timeline.
The underwriting process typically involves a thorough examination of the borrower's financial situation. This includes their credit history, income, employment status, and other relevant factors. Lenders use this information to determine whether the borrower is capable of repaying the loan. As well as whether the loan amount is appropriate given the borrower's financial situation.
During the underwriting process, lenders will typically review the borrower's credit report to determine their credit score. The higher your score, the less of a risk you present, and the more your lender will approve your loan.
A credit score is a numerical representation of a person’s creditworthiness. Credit scores range from 300 to 850. There are several factors that contribute to your score, including payment history, amounts owed, length of your credit history, your new credit accounts, and the types of credit you use.
A good credit score ranges from 670-739. An exceptional credit score ranges from 800-850, very good from 740-799, fair from 580-669, and poor from 300-579.
The required credit score for a home loan depends on the type of loan you are applying for. Conventional loans typically require a credit score of 620 or higher. FHA loans usually require a minimum score of 580. If two or more borrowers are on a loan, lenders take into account the lowest median score or average scores of those involved, depending on the type of loan.
In addition to reviewing the borrower's credit report, lenders will also verify the borrower's income, employment status, and financial reserves. The latter may include your savings, stocks, and real estate. A steady paycheck and good savings signal to your potential lender that you’ll be able to make loan payments on time.
Lenders may also consider other factors such as the borrower's debt-to-income ratio, which is a measure of how much debt the borrower has relative to their income. A high debt-to-income ratio, also known as DTI, may indicate that the borrower is overextended and may struggle to make their loan payments.
This factor is less dependent on you as the borrower, but it’s still very important. Your underwriter will order an appraisal to make sure that the value of the property and the value of the loan match up.
If you started the house hunting process with a prequalification, you only received assurance that you could potentially be approved for a loan. Once you have a purchase agreement with a seller, you must undergo the underwriting process in full.
If you started the house hunting process with a fully underwritten preapproval, then you are a step ahead. You had to supply more documentation upfront to gain preapproval, which makes the underwriting process simpler once your house is under contract. Rather than submitting all of your financial documentation for the first time, you are simply updating existing documentation.
Once the underwriting process is complete, the lender will typically make a decision on whether or not to approve the loan. If the loan is approved, the lender will provide the borrower with a loan agreement that outlines the terms of the loan, including the interest rate, repayment schedule, and any fees or penalties associated with the loan.
What if you don’t get approved? Your lender may respond with several other outcomes: your mortgage application is denied, suspended, or conditionally approved. If your loan application is denied, the lender will typically explain why. You can address their concerns and apply again in a few months, apply for a smaller loan amount, or try to submit a larger down payment. If your loan application is suspended, there is likely documentation missing from your file. You may be able to reactivate your application once you provide extra information. Finally, if your loan application is conditionally approved, there may be missing documentation, but the lender is still likely to approve the loan once you provide the necessary information.
In some cases, lenders may require borrowers to provide additional documentation or information to support their loan application. For example, a lender may require a borrower to provide bank statements, tax returns, or other financial documents to verify their income and financial situation.
It is also worth noting that the underwriting process can take some time, especially for larger or more complex loans. In the Bay Area, the preapproval underwriting process takes approximately one week, while it may take two to three weeks in other areas of the country.
Borrowers should be prepared to provide all the necessary documentation and information requested by the lender and should be patient throughout the underwriting process. The best thing you can do to keep the process moving is to stay on top of communicating with your lender and submitting all necessary information in a timely manner.
In conclusion, underwriting is a crucial step in the lending process. It involves a thorough assessment of a borrower's creditworthiness and financial situation, which helps lenders to determine whether or not to approve a loan application. While the underwriting process can be time-consuming, it is an important step in securing a loan and obtaining the financing needed to achieve one's financial goals.
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