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What Is Mortgage Underwriting?

March 09, 2021 · 4 minute read

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What Is Mortgage Underwriting?

The most important step that will determine whether or not a person can purchase a home is underwriting. The underwriter will see if you’re fiscally fit enough to take on a mortgage and that it’s a manageable size.

Because most people won’t pay for a home out of pocket and will instead have to apply for a mortgage, underwriting must take place before they can close on a home. If all goes well, they can move into their chosen home and begin making monthly payments they can afford.

By learning about underwriting, potential homebuyers will be prepared to handle what comes next.

What Does an Underwriter Do?

Underwriters protect a financial institution by making sure that it only approves applicants who have a good chance of paying the lender back. They:

•   Verify documents and financial information and make sure that enough savings exist to supplement income or to contribute toward the down payment.
•   Look into an applicant’s credit score and history, note any bankruptcies, late payments, a lot of debt, or any other red flags.
•   Calculate the debt-to-income ratio by adding up an applicant’s monthly minimum debt payments and dividing that number by monthly pretax income.
•   Reach out to the applicant to ask questions and request additional documents, if necessary. For example, if an applicant has had more than one job over the past year and their income is not consistent, an underwriter may want to see more assets.

What Is the Underwriting Process?

A mortgage underwriter has the final say on mortgage approval or disapproval. Here are common steps leading up to underwriting:

1. Find a lender. Shop around for the best deal, including the rate, fees, and conditions.

2. Get preapproved for a loan. Perhaps you were prequalified for a ballpark figure, based on self-reported financial info. Now it’s time to verify your income, employment, assets, and debts and allow a look at your credit history and credit scores.

A preapproval letter indicates the willingness to lend you a particular amount, and the interest rate and fees you can expect to pay on that loan. A letter also allows a buyer to act quickly in a seller’s market.

3. Go house hunting. You find a home that meets your needs, and agree on a price.

4. Apply for the loan. You probably submitted documents in order to get preapproved, but a preapproval letter is not a promise. The lender will likely ask for further documentation now that you’re ready to act on a purchase and will take another look at your credit.

5. Wait for the underwriting verdict. A loan processor will confirm your information, and then it’s time for the underwriter to review your credit scores and report, employment history, income, debts, assets, and mortgage amount.

The underwriter will order an appraisal of the chosen property and get a copy of the title insurance, which shows that there are no liens or judgments. Finally, the underwriter will consider your down payment.

Then comes the decision: approved, suspended (more documentation is needed), or denied.

Required Information for Underwriting

Lenders are going to request a number of documents from mortgage loan applicants.

Income verification. The lender will want to see W-2s from the past two years, your two most recent bank statements, and two most recent pay stubs.

Those who are self-employed will need to document stable work and payments and ideally have a business website. Applicants will typically need to show evidence of at least two years of self-employment income in the same field.

Any additional income. Pension, Social Security, alimony, dividends, and the like all count.

Proof of assets. This can include checking and savings accounts, real estate, retirement savings, and personal property.

A lender might want to see that a down payment and closing costs have been in an applicant’s account for a while.

Debts. The debt-to-income ratio weighs heavily, so list all monthly debt payments, each creditor’s name and address, account numbers, loan balances, and minimum payment amounts.

Gift letter. If an applicant is receiving money from a family member or another person to put toward the house, the lender will request a gift letter and proof of that funding in the applicant’s account.

Rent payments. Renters will likely need to show evidence of payments for the past 12 months and give contact information for landlords for two years.

How Long Does Underwriting Take?

Underwriting may take a few days or a few weeks.

Preapproval happens quickly, which may lead applicants to believe that underwriting will be fast as well. It all depends on how complicated someone’s finances are and how busy an underwriter is at that moment.

Thankfully, underwriters typically do everything online these days, so an applicant can upload documents to a website or simply email them.

How Can I Improve My Chance of Approval?

Before applicants try to get a mortgage, they can take a number of steps to improve their chances of getting approved.

Lighten the debt load. It’s critical to pay off as much debt as possible and to ideally make sure your credit utilization ratio is below 30%, though some lenders like to see a ratio below 25%. Applicants can pay off debt faster by budgeting, using cash instead of credit cards to make purchases, and negotiating interest rates with creditors.

Look at credit reports. Applicants should also scour their credit reports and fix any mistakes so that their score is as high as possible. Federal law guarantees the right to access credit reports from each of the three major credit bureaus annually for free. The reports show only credit history, not credit scores. Want weekly credit score updates? SoFi Relay, a free money-tracking app, includes that feature.

Attempt to boost income. Applicants may want to apply for higher-paying jobs or add a side hustle so they can save more money.

Ask for a gift or loan partner. They could also ask a family member for a gift to put toward the down payment, or they could ask a relative with a stable credit history and income if they would act as a co-borrower or co-signer.

With an underwriter helping an applicant, a solution may be found that leads to approval.

The Takeaway

Ready to apply for a mortgage? Prepare for a probing look at your private life—the financial one—by an underwriter, who is gauging the risk of lending you a bundle of money. The underwriter looks at a person’s finances and history, the loan amount, and the chosen property and renders a verdict.

Mortgage shoppers should add SoFi home loans to their list. Why? You can put as little as 5% down, access competitive rates, and save on your mortgage loan or refi processing fees just for being a SoFi member.

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