The Underwriting Process
October 4, 2022
The term ‘underwriter’ originated with the practice of requiring ‘risk-takers’ to write their name under the total amount of risk they were willing to accept in a contract. If you have ever applied and received a mortgage to purchase a home, you have probably heard of underwriting. Today, it is the process the lending institution follows to assess the risk of lending money based on how likely the applicant is to pay it back. Some things that factor into the decision include your credit score and history, income, assets, debt-to-income ratio, the home’s appraisal, and the amount of your down payment, as a bigger down payment generally provides less risk for the lender.
The loan process
After pre-approval, the next step is processing. The processor reviews all documents and determines if more information is needed. The processor orders supporting documents such as flood certifications, appraisals, tax transcripts, verifications of employment, and title work. Underwriting is typically the next step after you have received pre-approval and the loan has gone through processing.
How does underwriting work?
On average, underwriting takes about three to six weeks. The lender will verify your income and assets through such things as tax returns, bank account statements, and investment/retirement account statements. During this time, a home appraisal will be ordered to ensure the house is worth the amount the borrower is requesting and the title company will perform a title search to confirm the property can be transferred from the seller to the buyer.
Before the underwriter can make a decision, all contingencies listed on the purchase agreement, such as home inspection or loan approval, must be cleared. The underwriter can then decide to approve, suspend, or deny the application. A suspension does not mean the application has been denied, but, rather, more information or documentation might be required for the underwriter to make a decision. Denials often occur due to new or hidden debt, the loss of a job, or issues with the home, and can be issued by the underwriter as long as he or she is evaluating the application based on objective metrics and not breaking any anti-discrimination laws.
There are certain underwriting standards lenders follow when evaluating loans. For conventional loans, many lenders adhere to Fannie Mae and Freddie Mac standards. Similarly, for FHA, VA, or USDA loans, lenders typically follow the guidelines set forth by the Federal Housing Administration (FHA), Department of Veterans Affairs (VA), and/or Department of Agriculture (USDA).
Borrower tips during the underwriting stage
As a borrower, there are a few basic things you can do to help ensure the underwriting process goes as smoothly as possible. These include:
- Don’t apply for other credit lines – this can negatively impact your credit score and change your debt-to-income ratio, and could lead to a denial if the risk becomes too great as a result
- Respond quickly to questions – delays in providing answers could add time to the underwriting process
- Provide all documentation – closing could also be delayed by a failure to provide all the necessary documents in a timely fashion
- Be upfront about finances – the underwriting process will uncover any financial issues you may try to hide, so it is best to be honest from the very beginning
If you are thinking about buying a home, moving forward with this knowledge should help make the homebuying process feel less intimidating and provide you with peace of mind while underwriting is reviewing your application.