You’ve set your sights on purchasing a home, and you’ve saved up your hard-earned money, cutting back on buying that morning cup of coffee and dinners out. You’ve done your homework, scouring available listings and spending weekends going to countless open houses. You’ve explored neighborhoods inside and out to get a feel for what is the right fit for you and your family. At last, you found the one — the newly renovated colonial in a great neighborhood with top-ranked schools and a spacious yard and a deck for entertaining guests. You decide to make an offer!
Buying a home can be a long journey, but there’s one part of the process that homebuyers find particularly daunting — underwriting. The word underwriting dates back to the 17th century and comes from insurance companies writing their name under the total amount of risk they were willing to accept for a specified premium. This general concept holds true today, only with more steps involved.
For homebuyers, underwriting is the part of the mortgage approval process when a mortgage underwriter does a deep dive into your financial history to see if you can pay back the loan you’ve applied for to buy that dream house. The average time to buy a house with a mortgage is 48 days for purchases and 57 for refinances. While the underwriting process itself can range from a few days to a few weeks, that time can be a stressful one. We spoke with industry experts to find out what a mortgage underwriter does and provide you with useful insider tips on how to make the underwriting piece of the homebuying journey go as smoothly as possible.
What does a mortgage underwriter look at?
The purpose of underwriting is to evaluate the risk of lending you money for a mortgage. In order to do this, a mortgage underwriter does a thorough inspection of your financial affairs, from W-2s to credit scores. Although it may seem like a lot of documentation is needed, putting yourself in an underwriter’s shoes can help you understand why they request detailed financial documentation. Here’s a closer look at what your underwriter will look at.
The three digits that hold a lot of weight: your credit score
A good credit score will help determine how much you can borrow and the interest rate a lender offers. The higher the score, the less risky you may look to a lender. The FICO Score is used by more than an estimated 90% of lenders, and is based on your payment history, credit usage, age of credit account, types of credit, and inquiries for new credit lines. Other credit scores commonly come from three main credit reporting agencies: Experian, Equifax, and TransUnion.
Good-to-excellent scores range from 740 to 800-plus. If you have a score in this range, you’re generally viewed as more dependable and someone who likely pays bills in full and on time. If your score isn’t quite at that level, consider maintaining timely payments and not spending more than 30% of your credit card limit. For example, if you have a maximum of $2,000 of available credit on your credit card, you shouldn’t spend more than $600. A lower credit utilization can help boost your credit score.
“It’s a great idea to know your credit score when you start toying with the idea of home shopping,” says Samantha Mongeon, director of compliance at HomeLight Home Loans. “We always recommend getting your free credit report through https://www.annualcreditreport.com/. That way, if you find out that you have some work to do with your credit, you’ve got time to improve your score.”
Mongeon recommends reviewing your credit report at least six months to a year in advance of starting your home search to ensure that you know where you stand. “If you have room for improvement, you can get to where you ideally would be before you actually submit your information for an application or a pre-approval,” she says.
It’s also a good idea to familiarize yourself with common credit card terms so you can better understand how credit cycles, billing, and interest rates work. This can help you avoid interest payments and late fees.
Leaving no financial stone unturned
In addition to your credit history, a mortgage underwriter looks at your W-2s to verify your employment status and history. They’ll review several months of bank statements and tax statements, as well as your assets, including checking and savings accounts, real estate, stocks, and personal property. They will also look for a history of late payments, bankruptcies, and overleveraging of credit on your credit report, as well as any liabilities, such as child support or alimony.
A debt-to-income ratio, or DTI, is your monthly minimum debt payments divided by your monthly gross income. Underwriters look at this percentage to see how well you manage your debts each month — the higher the percentage the riskier you’ll look to a lender. Typically, lenders like to see a DTI of 45% or less (though some buyers can go up to 50%). DTI is based on revolving accounts and anything that’s a regular scheduled expense, such as student loans, credit cards, car payments, and your monthly mortgage payment — rather than one-time expenditures. Although underwriters won’t see monthly expenses such as cell phones, those should still be taken into account by you when you’re budgeting for a home so you’re not cash strapped.
“If you have a significant amount of expenses that are not listed on your credit report, you might want to take that into account,” Mongeon cautions. “It’s not just a question of qualifying, it’s also a question of how much you feel comfortable affording each month.”
Another consideration is your loan-to-value (LTV) ratio. To determine your LTV ratio, the loan amount is divided by the value of the asset, and then multiplied by 100 to get a percentage. For example, if you’re buying a house that is appraised at $500,000 and your loan is $350,000, the LTV is 70%. Basically, LTV is a way of expressing how much you owe on the home versus how much equity you own.
As you repay the loan, this LTV ratio will drop. As you might have guessed, the higher the LTV ratio, the riskier you may look to the lender. If your LTV is high, you may consider putting more money down or looking at less-expensive homes.
If you’re self-employed, defined as owning more than 25% of a company, the mortgage underwriter may require that you have enough reserves in savings to cover several months of mortgage payments.
“Loan officers might come back to you and say you need an additional $10,000 in reserves to cover a few months of monthly expenses as a buffer; you usually can’t just drain your accounts for a down payment,” Mongeon advises.
“Sometimes people are surprised by that piece, but often this can be accommodated by choosing a lower down payment program. So if you only have $10,000 for a down payment, you may be able to find a loan that allows for a lower down payment and then direct more of that cash toward your reserves.”
After a seller accepts your offer your mortgage underwriter will order an appraisal. The appraisal is a professional assessment of a property’s value based on a thorough review of the house and property by an independent appraiser. An appraiser inspects the property and does a walkthrough of the home, taking photos and measurements to evaluate the current condition. They’ll also compare it to similar properties nearby that are close in size and features, that have sold within the past six months.
Caishalynne Echols, AFC® and CFP® candidate at Gen Y Planning, said as of summer 2021, the real estate market is hot and homes are selling over the asking price. If the home appraises for less than the agreed-upon price, one option buyers have is to pay the difference.
“For example, if you are buying a home for $300,000 and the appraisal of the home comes back at $250,000, at closing you would have to pay your down payment plus the $50,000 difference between the appraisal amount and the asking price,” Echols cautions.
Other options if your appraisal comes in low include asking the seller to match the appraisal price, splitting the difference with the seller, or potentially walking away from the deal.
Property title search
As the homebuying process continues to move along, the lender will then typically arrange for a title search. This typically happens after an offer has been accepted but before ownership transfers to the buyer.
The property title will show who owns the home, and who has the right to sell the home. The search also looks at all local records and sources to find any available information about a home to tell you who may have a claim on it. This may surprise you, as anyone who may have been involved in home improvement on a home, such as a contractor, can put a lien on it. A property title search will also explain deed restrictions, which means what types of updates or construction the city won’t allow, such as a large fence that may obstruct a neighbor’s view, and be seen as an eyesore.
Property title searches aren’t always 100% accurate. This is where title insurance comes into play. If something is missed during the property title search, having title insurance means the buyer is protected and the title company will handle any issues.
Automated underwriting vs. manual underwriting
Mortgage underwriters assess loan information manually or through an automated process, which relies on a software program. Sometimes it’s a combination of both. Automated underwriting is faster but it can come with limitations. For those who don’t have ideal credit or who have more complicated financial situations, they may have a better outcome with manual underwriting since a software program makes decisions without much opportunity for explanation. If something is off, the automated system will usually return a “refer” recommendation, and a human will need to review your application outside of the automated process. This is a sample form an underwriter would manually fill out.
Some lenders have an online loan application process that can help simplify and speed up the underwriting step. HomeLight Home Loans, for example, allows applicants to directly upload asset and income documentation into the system. Once all of the information is provided, the company does a full underwrite, usually within 24 hours.
Providing all the information needed upfront allows a HomeLight underwriter to do a full analysis of finances to make sure you qualify before issuing a pre-approval letter. Mongeon notes that many lenders will only do a semi-verified pre-approval, and only pull your credit report.
“So they save the underwriting until after you’re in contract on a home,” Mongeon explains. “That can result in finding out some unpleasant things about your finances after you’ve already got an offer on the table, and can make things very complicated. We try to get all that work done upfront so you know full well what you can afford and the kind of house that you’re ready to buy. You can then go out and make a very, very strong offer and be confident that your loan will likely close, barring any other changes.”
When you’re approved … or denied
Once the mortgage underwriter reviews all of the information and paperwork you’ve provided, they’ll come to one of four decisions regarding your loan.
Approved: This is the ideal result. When you’ve provided all the correct documentation and are viewed as financially sound to the lender, there aren’t any title issues, and there are no outstanding questions, you will receive financing for your mortgage.
Approved with conditions: This is the most common outcome and in this scenario, you are close. The lender requires that you provide more documents, such as proof of employment or a tax form. As long as everything checks out, you should receive approval.
Denied: This means you are looked at as too risky to lend money to. The lender will explain why, whether it’s your credit history, too low of an income level, a low appraisal, unusual bank activity, or another factor. You then can determine if you’re able to remedy the problem, adjust your financing plan, or try a different lender.
Suspended: This may not be as serious as you think. It simply means the application has been put on hold because more documentation is needed. Once you provide it, the underwriting process will proceed.
Tips to help make borrowing a smooth experience
It’s a good idea to organize your finances and your financial documents early on — even before you begin the house-hunting process. But no matter where you’re starting from, you can take steps to help keep the loan application and underwriting process as simple as possible.
Get your documents in order
Make a checklist of all the documents you’ll need — including W2s, tax returns, and bank statements — so you can provide information the mortgage underwriter needs and respond to any queries quickly. You don’t want to be frantically digging through desk drawers or searching folders on your laptop for files. Also, be ready to explain anything unflattering on your credit report, even if you have a very good score.
Strategize your savings
Start saving for your down payment as soon as you can. There are several loan products available for homebuyers and some include low down payment options (some loans even offer zero down payment), but the more money you can put toward your home purchase, the more it can help lower the overall cost of your loan. If you’re considering a conventional loan, a lender will likely require you to pay private mortgage insurance (PMI) if your down payment is less than 20% of the home’s purchase price, so you’ll want to keep that in mind for your budget.
“Be strategic about where you hold your down payment savings,” Echols says, and recommends looking into an account that will accrue interest while you’re saving up.
Avoid major life changes or added expenses
Once you’ve entered the mortgage process, avoid any dramatic shifts in your financial profile. That means avoiding large expenditures, moving money around in accounts, or taking out new lines of credit. And if you can help it, don’t change jobs.
Don’t make the underwriter’s job harder than it has to be
Mongeon’s top piece of advice during the underwriting process is to be actively engaged with your loan officer and your team so that when they ask questions, you get back to them in a timely manner and keep the process moving forward.
“It’s not only trying to be organized upfront, but also if they ask for more [information], respond as quickly as possible so that you’re not slowing down your loan,” she says.
The mortgage underwriter has a complex job and making it through the underwriting process gets you one step closer to your new home. It’s likely been a long few months going through the homebuying process — and even longer if you factor in when you first started saving — but you should feel a great sense of accomplishment at the end. Sign all the paperwork, settle the closing costs, and get ready to move into your dream home!
Header Image Source: (Corryne Wooten / kaboompics)