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For example, a borrower with a high loan-to-value ratio may be able to put additional money into the down payment, thus reducing the loan amount and making a lower loan-to-value ratio. If the appraisal came in low, it is worth looking into why and see if there are adjustments that can be made, such as using more suitable comparable properties to improve the value of the collateral property. A change in the borrower's employment status or unusual bank account activity might be explainable in a way that satisfies the underwriter. The underwriter will review documents such as the borrower's credit reports from the three credit bureaus to determine if the borrower has a good credit history and makes their other payments on time. Once you have finished turning in all of your paperwork, the underwriters will look at your credit report, income, and current debt obligations to determine whether you have the means to pay back the loan. They will also examine the home appraisal and requested loan value, comparing the loan to the value of the home to ensure that the LTV ratio is acceptable.
Step 1: Complete your mortgage application.
The typical underwriting process ranges from a couple of days to several weeks-- though the entire closing process usually takes 45 days. Lenders generally require a down payment to lower their risk. A down payment improves the loan-to-value, or LTV, ratio, which measures the amount of your mortgage to the home’s appraised value. Each type of mortgage has its own requirements for LTV ratios. For example, first-time homebuyers can get a Federal Housing Loan loan with an LTV ratio of up to 96.5%, which means you'll need to put at least 3.5% down.
Buyers can hire inspectors and others to help them evaluate a property’s health. Mortgage lenders use a process known as underwriting to evaluate a loan applicant’s creditworthiness. Mortgage underwriting is a complicated and time-consuming process. Involving critical examination of the application and the credibility of the applicant, an underwriter approves or denies the loan application.
What to do if you think you’ll be declined
Once you have final approval, your loan package moves on to the lender’s closing department. To help avoid negative changes to your credit report, you can use autopay services to ensure you make your payments on time. Also, avoid applying for any new loans or credit during the underwriting process.
Loan underwriting is the process of a lender determining if a borrower's loan application is an acceptable risk. Underwriters assess the borrower's ability to repay the loan based on an analysis of their credit, capacity, and collateral. The underwriter can make a final decision without giving equal weight to each consideration. In mortgage lending, an underwriter’s job is to evaluate a loan applicant’s credit history and current financial situation. They will perform an extensive review to determine how much of a risk it would be to lend money to a particular applicant. If a loan applicant meets the lender’s underwriting guidelines, the underwriter will approve them for a mortgage.
How Long Does Underwriting Take? A Timeline
If you have a spouse or partner who is applying for the loan with you, their DTI will also play a role in whether the loan is approved. While the underwriting process can be daunting, you can take steps to help increase the likelihood of your loan getting approved. First, let’s learn in more detail about what could go wrong with your loan application. Guided by lender, investor and federal requirements, a mortgage underwriter will analyze your finances to make sure you aren’t a risky borrower. They want to see how your income compares to your debt, how steady your employment has been and whether you’re likely to continue earning a similar income for the foreseeable future. They’ll also analyze your application and supporting documents to make sure you’re not committing fraud.
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Lenders pull borrowers' credit at the beginning of the approval process, and then again just prior to closing. One reason underwriters constantly ask for more information is that they often receive documents piecemeal. Learn from this and send all the documents at once so the underwriter's touches-per-file go down. Lowering the touches will ultimately speed up the process and get your borrowers to the closing table faster.
The time it takes to close your loan includes the entire process from start to finish. The average time from application to closing was 45 days over the 12 months ending with August 2020, according to mortgage technology provider Ellie Mae. Some tech-forward mortgage lenders are differentiating themselves from their competitors by offering even faster underwriting.
Collateral is an asset that can be sold by the lender to repay the loan in the event that the borrower defaults on the loan. Common examples of collateral include a vehicle being financed for purchase or a home or property being financed with a mortgage loan. The next step in the underwriting process can vary a great deal depending on your loan officer and lender. The mortgage lender you choose, the type of loan you need, and the level of detail you've put into your documents will play large parts in determining your level of underwriting discomfort. Your debt-to-income ratio is an important factor in this review.
The underwriter will look at your credit score, credit history, and debt-to-income ratio to see if they meet various guidelines. They need to verify the information you gave on your mortgage application by checking it against your documentation. Underwriters look at your credit score and pull your credit report. They look at your overall credit score and search for things like late payments, bankruptcies, overuse of credit and more. A mortgage underwriter can assess your loan application manually or run it through a program, known as automated underwriting, to determine whether to approve you for a loan.
This typically involves providing additional information and documents. Hanna Kielar is a Section Editor for Rocket Auto℠, RocketHQ℠, and Rocket Loans®with a focus on personal finance, automotive, and personal loans. You can help your loan close faster by providing all the requested documents quickly. We’re transparent about how we are able to bring quality content, competitive rates, and useful tools to you by explaining how we make money. Bankrate follows a strict editorial policy, so you can trust that our content is honest and accurate. Our award-winning editors and reporters create honest and accurate content to help you make the right financial decisions.
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