Loan underwriting may sound mysterious, but chances are, you already experienced a similar (albeit simpler) process for your pre-approval letter. While pre-approval makes you competitive to sellers, it is not an official guarantee from your lender. Underwriting makes it official. It’s the final step for your lender before you close on the property.
Because underwriting is typically a hands-off part of loan approval, many home buyers and property investors don’t know what to expect from this financial process. There are steps you can take to ensure this goes as smoothly as possible because it’s important to know what’s happening behind the scenes.
Mortgage underwriting is the process during which your lender (whether a bank, broker, or credit union) decides if you qualify for the mortgage that will buy your property. Because you’re asking to borrow such a large sum, the lender isn’t going to hand it over without some thorough investigation into your financial background. A team of people working for your lender (underwriters) will look into your finances and the prospective property. From there, they will decide to extend a loan.
After you go under contract, an underwriter will verify your income, debt, and assets. This is all based on the documents you submit per their request—and, yes, you will need to resubmit what you already gave them during the pre-approval process. They will then assess the property itself with an appraisal and title search.
After gathering all the information they need, they will determine the risk of lending to you and either approve or deny you that whopping home loan.
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There are a number of steps in the underwriting process, which is why it feels like it takes such a long time! Here’s what to expect.
You, the borrower, will need to submit a handful of basic documents like recent pay stubs, tax returns, and account statements to your lender. From here, they’ll ensure that you have income to support your monthly mortgage payment as well as the funds for the down payment, closing costs, and some leftover for any worst-case-scenario maintenance or costs.
If you have any derogatory marks on your credit history, you may need to submit a statement that explains why that’s the case. Submit your investment asset statements like stocks, bonds, retirement accounts, or other real estate to show off your high net worth and financial health.
An appraisal is based on the sales price of similar properties in your area. It helps your lender understand the objective value of your new home. Once all the proper documentation is received, your lender will order an appraisal, which will ensure that the property is worth what you’re paying (or more) because the property itself acts as collateral in case you default on the loan.
Typically, the lender will order the appraisal, and you (the buyer) are involved only when the appraisal report comes in. The cost of the appraisal is often packaged up in your lender fees, so no action is required from you to choose, hire, or pay an appraiser. In fact, appraisals are required to be an “arm’s length” transaction, meaning neither you nor the lender can “choose” the appraiser.
“Title” specifies who has rights to the property. During underwriting, your lender wants to make sure that they (and you) are protected from any defects in the title that give another party a claim to the property. This could be other mortgages, a lien, an easement, or even a missing heir.
Typically, your lender will employ a title company to perform this final title search. And they will purchase title insurance to cover their stake in the property. You (and/or the seller, depending on your contract) should also purchase title insurance to protect yourself from any of these rare title problems.
After all is said and done, there are four possible outcomes: approved, denied, suspended, or approved with conditions.
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An underwriter takes a broad look at your finances. This includes:
As with any part of the home-buying process, this varies depending on your personal financial situation. You should do your part. This means handing over all the necessary documents to your lender as soon as possible. A 30–45 day window is typical for the underwriting process, though a decision can be made within weeks.
Your offer contract should have stated a deadline by which you must apply for the loan, so make sure you’re working with your lender before this deadline passes to avoid a breach of contract.
The underwriting process is complicated—and delicate, too. Here’s what buyers shouldn’t do while the underwriter is working.
Underwriting is the final step for your lender in which they verify all of your information and decide whether to officially extend a loan. After going under contract on a property, your lender will verify your income, debt, and assets as well as order an appraisal and a title check for the property.
Besides simply being cooperative and honest during the entire loan process, make sure you’re offering at the right price and on the right property to avoid problems with approval. Similarly, take good care of your finances and avoid large transactions during the entire home-buying process to ensure a smooth underwriting process. After underwriting, you’re off to closing—and on your way to homeownership!
Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.