During the mortgage underwriting stage, your application moves from the lender to the mortgage underwriter. Their role is to ensure you meet the loan criteria, which will ultimately lead to their final decision: to approve or deny your loan request. Here are some things you should know about the mortgage underwriting process.
What is Mortgage Underwriting?
Mortgage underwriting is an important step in the home-buying process. This is the part where banks and lenders measure the risk of loaning money to a certain borrower, and to determine if that risk is acceptable.
They will look at credit history, income, debt and other factors to ensure the borrower meets all the requirements for the loan.
What Happens When A Mortgage Goes to Underwriting?
Underwriters will investigate your documentation to make sure your application and documents you provide are truthful and accurate.
Items you will be asked to provide:
- Tax returns
- Recent pay stubs
- Verification of employment
- Copy of government-issued ID
- Permission to pull credit
How Underwriter’s Assess Risk
The underwriter assesses the borrower’s risk by following the guidelines of the “Three C’s.”
The underwriter will assess your employment history, income, and debts to determine if you have the means to pay off your debt. However, if you are self-employed, you may be asked to provide extra documentation of your income.
One important factor to assess your ability to repay your loan is your debt-to-income ratio. Your debt-to-income ratio determines how much of your income is needed to pay your debts, such as your mortgage, your credit card payments, and your student loans.
In most instances, your combined debt should be less than 45% of your monthly gross income.
They may also assess your current savings and 401(k) to determine if you will still be able to repay your debt if you happen to lose your job or get ill.
Your credit score is very important when it comes to getting a mortgage. Credit scores are evaluated based on credit card accounts, loans, balances, and payment history. Normally, payment history and amounts owed are most important to underwriters. How well an applicant has paid their debt in the past is a great indication of how well they will continue to do so in the future.
The home that the borrower is purchasing is considered collateral. The underwriter will look at the type of property, its value, how the property is used and other related factors in order to determine the risk involved in approving the mortgage. In order to place a value on the property, an underwriter will typically order a home appraisal, which will assess the home’s current worth.
How Long Does The Process Take?
The length of the underwriting process can vary based on the underwriter and the number of applications they have pending. So, it can take anywhere from three days to a week to hear back.
How to Reduce Your Risk
As you are preparing to apply for a loan, there are many ways you can reduce your risk of loan denial. Here are a few factors you should monitor and work on.
Lower Your DTI
It’s a good idea to repay your debts before applying for a mortgage loan. Paying more than the monthly minimum is going to decrease your overall debt and therefore, will lower your DTI. Try not to add on any more debt than you already have before you start the loan process. This means avoiding opening a new credit card or getting a car loan.
If you aren’t sure what your DTI is, follow these steps below.
Steps to determine your DTI:
- Add up all monthly debts
- Rent, student loans, car payments, credit card payments, etc.
- Divide your monthly debts by your monthly gross income
- Determine whether your DTI is within an acceptable range
- Having a DTI lower than 50% means you have a good chance of getting approved for a mortgage. If you have more than 50%, it’s going to be tougher, so you will need to work on ways to lower your DTI.
Increase Your Credit Score
As you are preparing to apply for a home loan application, consistently monitor your credit score. Lenders and underwriters deem credit scores as one of the most important factors of the mortgage review.
Making your payments on time, keeping your current job, staying with your current bank, maintaining low credit card balances and avoiding major purchases can all help raise your credit score, and also decrease your DTI!
When applying for a loan, it’s important to consider employment stability. Most lenders like to see at least two years of steady income with your employer, so any changes, even if positive, could cause a problem. If you’re planning on making a job change, keep this in mind and let your lender know.