What Is Mortgage Underwriting and How Does it Work?

When you get a mortgage to buy a house, underwriting is one of the last steps your mortgage lender needs to take before you can close the deal. The process can take a little time, but you can do things to help you get through the underwriting stage quickly and smoothly. Understanding the entire process can ensure that you are prepared for what will occur and have all the information and documentation you need to provide ready. 

What Is Mortgage Underwriting?

Mortgage writing, also known as underwriting, is the process of checking your income, debt, and assets, as well as the value of the property you are buying. If you have pre-approval for the mortgage, then your lender had already done a basic check of your credit and finances before you offered to buy a property. However, this was only to determine how much they are willing to let you borrow. 

After making an offer, a more thorough review is needed based on the actual purchase terms agreed upon. Mortgage underwriters are responsible for completing an assessment of a borrower’s risk before approval for a mortgage can be issued.

What Does An Underwriter Check?

A mortgage underwriter conducts a thorough assessment of the borrower’s finances along with appraisal information. In general, you can expect a mortgage underwriter to look at the following types of information. 

Property Appraisal
Your mortgage underwriter will review the sale prices of similar houses in the area you are looking at to check that the price you are offering reflects the home’s actual value and you are not overpaying. 

Income Verification
The mortgage underwriter will ask you for documents proving your source of income and employment status. If you are employed, the underwriter may contact your employer directly or they may simply review some recent income documentation such as W2s. You will need to provide a signature to confirm that your employer can release your employment and income information to the mortgage lender.

If you are self-employed, the mortgage underwriter will ask for your tax return transcripts from the IRS (IRS Form 4506-T). Depending on the situation, the mortgage underwriter may also ask for attestation from a certified public accountant. This is more common if you have a complex income situation and the mortgage writer needs a third party to confirm the authenticity of the income information you provide.

Debt-to-Income Ratio
Your debt-to-income ratio is the percentage of your monthly income that must be spent on minimum monthly debt payments. This lets underwriters verify that you have enough money each month to make a mortgage repayment that is not already allocated toward other debt payments.

Savings Verification
An underwriter will also want to look at how much money you have in savings accounts. Most house sales involve a down payment, so the mortgage underwriter will want to confirm that you have enough funds to make the down payment. If your income is not enough to support the monthly repayments alone, they will verify that you have enough savings to cover the difference.

How Long Does Mortgage Underwriting Take?

Most mortgage writing is complete within a week or less, but it can take longer if additional information or documents are needed. Busier times of the year, such as during the holidays and in the spring housing rush, can also create longer lead times. 

Reasons a Mortgage Underwriter May Reject Your Application

Having pre-approval for a mortgage does not guarantee that your mortgage application will be successful, although it is a helpful first step. There are a few reasons a pre-approved mortgage could be rejected later during the mortgage writing process:

Your financial situation has changed
If your income, debt, or savings have changed since pre-approval, then the pre-approval decision was made based on outdated information. When your current financial situation has been re-assessed, a mortgage underwriter may find that your risk is higher or that you will be unable to sustain the interest and repayment terms that were initially pre-approved. 

Changing jobs or taking out a new loan are the most common causes of an issue here. Losing your source of income is likely to cause rejection if you don’t have the savings to cover repayments. On the other hand, changing to a similar or higher-paying job may not cause your application to be rejected but could cause a delay as your finances are re-calculated.

The mortgage underwriter found a red flag
The mortgage underwriter may find something in your finances that increases the risk of lending to you. For example, they might have found a debt or other financial commitment that you have not previously disclosed. 

Discrepancies in your income are another common cause. Particularly when you have a variable income, for example, are self-employed or earn a commission, a miscalculation or accidental omission could result in an incorrect assessment in the pre-approval stage, leading to a rejection when uncovered in the mortgage writing stage.

How Can You Speed Up The Mortgage Writing Process?

There are a few things you can do to ensure the mortgage writing process goes smoothly:

Watch Your Email
Your lender may need to get in touch for additional documents and other information. The faster you respond, the sooner they can continue the process. When a document is requested, provide the whole thing rather than guessing which pages or sections the mortgage writer needs to see.

Disclose Everything
The mortgage writing process is very thorough and is likely to uncover any mishaps in your financial history, whether you disclose them upfront or not. If you disclose any potential issues with your credit upfront, however, your mortgage underwriter can work with you to overcome them.

Finalize Negotiations First
If your purchase agreement changes, this could cause delays in the underwriting process as some items may need to be recalculated. Finalizing negotiations and the extra steps surrounding them — including the home inspection that might uncover issues that change the house’s value — will reduce the chances of a delay. 

The mortgage writing process is a critical stage of buying a new home, and you will want to be prepared before you begin. Knowing what to expect as well as red flags that could jeopardize your application can help you avoid surprises and speed up the process of settling into your new home.

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