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The Loan Underwriting Process
The pandemic brought heightened uncertainty throughout the economy, with many businesses shutting down temporarily or permanently due to the lockdown. The government responded with a $2 trillion stimulus package and another $3 trillion underway along with the Federal Reserve cutting interest rate cuts to support the economy and help and consumers recover from the shock. With the interest rate cut to near zero, it may be an excellent time to take out a loan or get a mortgage. To get a loan, you’ll need underwriting approval, so make sure you understand what underwriting is and what underwriters look for.
What is underwriting?
Lending money is a risky business for a financial institution because not all borrowers can repay the amount they borrow. For this reason, a bank, credit union or mortgage lender needs to determine whether a loan applicant can pay back a loan before approving it. This process of assessing the risk of lending money to a loan applicant is called underwriting, and the person who is responsible for this activity is called the underwriter. Underwriting has been around for a long time. It’s believed that the term was coined by the famous insurer Lloyds of London in the 17th century.
What does an underwriter do?
When you apply for a loan, your application will go to an underwriter. If you ever wondered what an underwriter is, it is a person that evaluates your financial health to assess your creditworthiness and the associated level of risk.
Underwriters use their expertise and experience to adequately evaluate all aspects of your application and the level of risk associated with it. More specifically, they:
- Review loan applications
- Examine each detail that may impact the repayment potential of an applicant
- Assesses the level of risk associated with each application
- Make the final decision: Approve/reject loan applications.
What are the costs involved?
When you apply for a mortgage, financial institutions will charge you an underwriting fee. This fee will cover the costs of originating, processing, underwriting and closing your mortgage loan.
For these underwriting services, the financial institution will charge a fee as it needs to evaluate your application and prepare your mortgage loan. The mortgage fee is meant to cover administrative costs such as an appraisal, a credit report, flood certification, notary fees, legal fees and a tax service fee. It will also cover the lender’s overhead.
What does a mortgage underwriter look for?
An underwriter will look for everything in their power to assess how risky a borrower you would be. For example, when you apply for a mortgage, a mortgage underwriter will evaluate both you and the house to check if you meet the lender’s minimum criteria and reach a final loan decision.
First, an underwriter will check your credit history and payment records to make conclusions about your past financial behavior. Then, they will check your credit capacity, which is determined by the income you make each month or assets you own, such as a house, stocks, retirement accounts and more. Underwriters will also look at the loan collateral, which is usually the house you want to buy. They will appraise the property and evaluate its value and legal docs to see if there are certain red flags on the property that might turn into problems in the future. Finally, the underwriter will check whether you meet the minimum requirement for a down payment, usually set at 20% of the house value.
What to expect when getting a mortgage
Getting a mortgage can be an overwhelming experience, so knowing what to expect and understanding the people involved and their roles can help you go through the process smoothly so you can get your dream home as quickly as possible.
You will start your home buying journey by filing a mortgage application with a loan officer who will use your credit, employment and financial information to check if you qualify for a mortgage and offer mortgage financing options that are aligned with your financial capacity. A loan processor then prepares your mortgage application and loan information for presentation to the mortgage underwriter.
Furthermore, a real estate appraiser will assess the property to determine its fair market value or how much it’s worth, while an authorized inspector will inspect the house for any damage, defects or structural issues. At the end of the process comes a representative of a closing company that oversees and coordinates the closing, records the closing documents and distributes money to the relevant parties involved in the mortgage.
Things to keep in mind
How long does underwriting take? This will depend on the number of factors, but there are things to keep in mind that will help you speed up the process of buying a home. Make sure you take on the following tips to avoid common mortgage underwriting pitfalls.
First, some pitfalls related to the property. For example, if the appraisal of the house is low and the home is worth way less than the mortgage, the underwriter may reject the application. Lenders want to make sure that the collateral that protects the money they lend you is clear of any red flags. These may include things such as deferred maintenance, which is a term used for a property that has not been well maintained, questionable structural integrity that includes things like unstable foundation, and also a presence of pests such as termites that can cause severe damage to the property.
Then, there are aspects of your credit history and capacity that may work against your loan application. For example, underwriters will pull out your credit report and check your credit score and history to see whether you have a history of late payments or defaults, which never looks good on the application. Then, your underwriter wants to know if you have enough income to cover your mortgage payments every month and will verify if your documented income matches the income you reported on the application. This will serve as a number to calculate your debt-to-income ratio, which should preferably be below 50%.