The process involves several steps, from getting preapproved for a loan to the final underwriting decision. To make this process smoother, keep your paperwork organized, ensure your credit is in good shape, consider making a larger down payment and be honest about your finances.
Underwriting can take as little as a few days or as long as a few weeks. It takes place after you have an accepted contract on a home, but before closing.
How often does an underwriter deny a loan? A mortgage underwriter typically denies about 1 in 10 mortgage loan applications. A mortgage loan application can be denied for many reasons, including a borrower's low credit score, recent employment change or high debt-to-income ratio.
Once you've submitted your application, a loan processor will gather and organize the necessary documents for the underwriter. A mortgage underwriter is the person that approves or denies your loan application.
The underwriting process happens after the down payment is made, but before you close on a house. That means that the timing of this home loan process can be crucial, particularly if you are hoping to move in by a certain date.
Your mortgage process is fully complete only when the lender funds the loan. This means the lender has reviewed your signed documents, re-pulled your credit, and made sure nothing changed since the underwriter's last review of your loan file.
Underwriting is the process of your lender verifying your income, assets, debt, credit and property details to issue final approval on your loan application.
Your final conditions may include things like bringing in your down payment, paying off an outstanding judgment or closing certain accounts. Conditions can include just about anything that a lender needs to be confident that you can repay your mortgage as agreed.
For this reason, the interaction between a loan officer and an underwriter is limited to a simple transfer of the borrower's facts and data. A loan officer may not attempt to influence the underwriter. Loan officers and underwriters are both crucial roles in the home buying process.
Credit is pulled at least once at the beginning of the approval process, and then again just prior to closing. Sometimes it's pulled in the middle if necessary, so it's important that you be conscious of your credit and the things that may impact your scores and approvability throughout the entire process.
Mortgage companies and other lending institutions may review any data contained within your credit reports. Data from the past 24 months is the most important information that mortgage lenders look at. However, they could look at derogatory information, like foreclosures or bankruptcies, that happened years before.
Debt-to-income ratio is high
A major reason lenders reject borrowers is the debt-to-income ratio (DTI) of the borrower. Simply, a debt-to-income ratio compares one's debt obligations to his/her gross income on a monthly basis.
Step 4: Final Approval
Once all conditions have been met, the underwriter will give final approval for the loan. This means that the lender is ready to close the loan and fund the purchase of your new home.
Most preapprovals are good for 90 days, but some lenders issue 60-day and 30-day limits. Best practice is to get preapproved for a mortgage just before you begin serious house hunting.
A mortgage that gets denied is one of the most common reasons a real estate deal falls through. When a buyer's mortgage is denied after pre-approval, it's in most cases the fault of the buyer or the lender that pre-approved them. Many of the reasons a mortgage is denied after pre-approval are actually fairly common.
They evaluate credit and payment history, income and assets available for a down payment and categorize their findings as the Three C's: Capacity, Credit and Collateral.
The Underwriting Process of a Loan Application
One of the first things all lenders learn and use to make loan decisions are the “Five C's of Credit": Character, Conditions, Capital, Capacity, and Collateral. These are the criteria your prospective lender uses to determine whether to make you a loan (and on what terms).
After an underwriter has reviewed your finances, there are generally two answers you could receive for a loan status: Approved: If your loan is approved, you will be sent a commitment letter describing the terms for paying back your loan.
An Underwriter ultimately decides what is required for a full loan approval. The Underwriter will review the file and send the Processor a list of “conditions” that need to be met prior to issuing the “clear to close”.
There are many reasons why an underwriter may deny your mortgage loan, such as a low income, an unsatisfactory credit history or a recent change in employment. If an underwriter denies your mortgage loan, try going to a smaller lender or addressing the issues that caused the denial in the first place.
Do Lenders Check Your Credit Again Before Closing? Yes, lenders typically run your credit a second time before closing, so it's wise to exercise caution with your credit during escrow. One of your chief goals during escrow should be to ensure nothing changes in your credit that could derail your closing.
Once a mortgage underwriter has given approval, the next step would be a formal offer and exchange of contracts. A full breakdown of the mortgage process can be found here. With a formal mortgage offer, the lender does reserve the right to withdraw the application if circumstances change.
While the underwriting process is happening, the lender will order an appraisal, typically conducted by a licensed appraiser, to assess and evaluate the property a borrower wishes to purchase.