UNDERSTANDING THE UNDERWRITING AND LOAN APPROVAL PROCESS
The role of an underwriter is crucial in the mortgage industry. In the simplest terms, underwriters examine your finances to determine the level of risk a lender would be taking on in granting you a loan.
Though perhaps overwhelming at first glance, understanding how the underwriting process and loan approval works can be an excellent advantage when entering the home loan or refinancing process. Here’s a short breakdown of the approval process, the documentation you’ll need to provide, and the mistakes to avoid.
The Steps of the Approval Process
When evaluating your financials, Underwriters look at a look at a handful of attributes, including:
Most require a minimum score of 620 to qualify for a conventional loan. Your underwriter will look at your credit score to determine how well you have made payments, how quickly you have paid off debts, and how many lines of credit you have open.
To be approved for a conventional home loan, your debt-to-income (DTI) ratio must typically be less than 43%. This means your monthly payments on debts such as student loans, car payments, credit cards, etc. cannot exceed 43% of your qualifying pre-tax monthly income. This figure signals to the underwriter how much additional debt—in the form of a mortgage—you should be able to reasonably afford.
Conventional home loans typically require a minimum downpayment of 3%, though some loans (the VA Home Loan for example) have different requirements. The larger the downpayment you can provide, the less risk you present to the lender.
Income and Employment History
Underwriters often look for the length of time you’ve been employed, how much money you make, and how you are paid (hourly, salary, etc.). Having a steady and regular income is crucial when you are applying for a mortgage. In fact, independent contractors not working for an employer under a W9, typically have to show two full years of earnings for loan approval.
After you make an offer on a home, the underwriter will require an appraisal of the property to compare the sales price to its market value. If the sales price is higher than the market value, granting you a mortgage becomes more of a risk to the lender. In the event that a house doesn't appraise for the sales price in the contract, the buyer and seller must come to an agreement on how to bridge the gap.
Documents You’ll Need
The length of the underwriting process can generally range from a few days to a few weeks. It often depends on how much financial information there is to assess.
Presenting all your financial documents to your loan officer on your first visit can help speed the process up. These documents might include:
1099 forms and profit and loss statements for self-employed individuals
Bank account statements
Divorce decrees verifying alimony and child support payments
Documented rent payments
Documents for the sale of assets
Letters of explanation for credit mishaps
Proof of outstanding, long-term debts
Proof of social security or disability income
Recent pay stubs
Retirement account statements
Stock or bond account statements
Two years of tax returns
W-2s from the past two years
Missteps to Avoid While in Escrow
Your lender will likely run an approval check at the beginning of the loan process, as well as right before closing. If any of your financial indicators changes during this time, this could result in your loan getting rejected in the final stages. Here are a few missteps you should try to avoid while in escrow:
Damaging your credit
Continue to practice good credit habits by taking care of all your payments on time. You should also avoid closing or opening any lines of credit to avoid a score reduction or changes in your DTI.
Making a major purchase
Hold off on purchasing anything that will require you to take out an additional loan, like a new car or home appliance. This could alter your credit score and your DTI and negatively affect the decision of your loan.
Changing jobs, while you’re waiting to be approved will require the underwriter to reassess your application. This could slow down the approval process or even result in a denial. If you are considering changing jobs, be sure to notify your lender so they can include that in their assessment.
After an underwriter has reviewed your finances, there are generally two answers you could receive for a loan status:
Approved: If your loan is approved, you will be sent a commitment letter describing the terms for paying back your loan. This might include your monthly costs, your annual percentage rate (APR), and any conditions that you’ll have to meet before closing on a house.
Denied: If your application is denied, the underwriter has deemed you not yet eligible for a loan. You will receive a denial letter describing the reasons you were declined.
Suspended: Additionally, there are times when the decision is made to suspend your file until additional documentation is received. This typically occurs when the underwriter is unable to approve you without getting further questions answered.