If you are planning to apply for a home loan for the purchase of your new house, you may have come across several terminologies that may have confused you. One of them would certainly have been the term ‘underwriting.’ There are several stages through which every loan application must go through. And the process of underwriting happens to be one of them. It is a long and tedious process for which you have no control over, but it is an absolute necessity to get approved for a home loan.
In this article, you will learn ‘how long does the underwriting process takes, what is underwriting and you will further examine how to speed up the process to minimize anxiety, if possible. This article is part of a series ‘All About Mortgages ‘that answers the questions, gives guidance, advice, for those who seek out general knowledge on the subject matter.
In this article we will seek out the following topics;
What is Underwriting?
In short, underwriting is “the process of making a final determination on approval or rejection of a loan application.”[i] The underwriting process entails the verification of the information that has been obtained from the borrower for the sole purpose of meeting the necessary underwriting requirements of the applicant’s creditworthiness.
In other words, to get a mortgage loan you first need to meet a mortgage loan officer. If you have met your mortgage loan officer, he/she must have requested you to submit all the documents necessary for verification of the loan. You may have thought that should be enough to grant you a mortgage loan? However, this is not the case. The underwriter must give the approval to sanction the loan. But who is an underwriter and ‘how long does the underwriting process take?’
After the loan application has been submitted to the mortgage officer, it is forwarded to an underwriter for the mortgage underwriting process. Every home loan request goes through the process of underwriting. In this process, the mortgage lender appoints an underwriter who facilitates the background check on the borrower to determine creditworthiness. He/she verifies the authenticity of the documents submitted by the borrower and the health of the applicant’s finances. It involves the evaluation of the applicant’s credit score, capacity to finance the loan, applicant’s employment history among other factors. It can take anywhere from a few days to four weeks and typically over a week for the underwriter to complete this process. All you can do is just sit back patiently and wait for the approval.
Resource – Mortgages 101
What happens during the process of underwriting?
The only way to evaluate the borrower’s ability to pay back the loan is to investigate the borrower’s past financials, assets owned and debts outstanding. There are several factors that help in determining the borrower’s ability to pay back the loan. An underwriter must investigate each one of them. They include the applicant’s credit history and credit score, the capacity to pay back, and the collateral. Let us have a look at these factors.
Credit History and Credit Score
Every (most) individual has a credit score. The score signifies the creditworthiness of an individual. It measures the extent to which an individual adheres to his financial commitments whether the applicant pays their bills on time, the quantum of existing loans, whether the applicant has made any defaults on previous loan payments, etc. Here the underwriter investigates the applicant’s financial statements, for instance, the applicant’s bank account details, pay stubs, tax returns, and so forth. The underwriter also spends a great deal of time studying, analyzing, and interpreting the applicant’s credit report. This helps the underwriter get an insight into the applicant’s financial discipline. All these constraints cumulatively determine the applicant’s success in approval. A credit score of 620 is considered ideal by Freddie Mac. Thereby, meeting the minimum underwriting requirement for a credit score.
Capacity to Payback
Here the underwriter evaluates your ability to repay the loan. He/she investigates the applicant’s debt ratio, the balance of savings accounts, the estimated amount of cash in your hand after making the down payment, and the number of borrowers for the loan. The underwriter determines the amount of loan you can borrow depending upon the strength of your finances. Further, the applicant’s monthly income, expenditure, and other expenses help the underwriter estimate the amount of loan that you can borrow.
Almost, every home loan needs to be secured against collateral. Generally, the home for which the loan is being bought is collateral or security. This ensures that in case of failure to pay the loan, the collateral (home itself) can cover the cost of the loan for the bank. The underwriter tries to measure the value of the property through property appraisals. The value of the home should be at least equal to or more than the value of the loan itself. The underwriter also investigates the type of home loan – whether it’s being purchased for a primary residence or for investment purposes. If it is for investment purposes the underwriting requirements may change significantly.
The underwriter might request you to submit additional documents or request an explanation on specific financial entries. For example, if the applicant had received a gift of $5,000 from a relative recently, it won’t be mentioned on the bank statements. It will just be a deposit. The underwriter absolutely has no idea about how this amount popped up in your bank account. To verify the source of this income, the underwriter may request the applicant to submit the details explaining the deposit. This is done to make sure that all the aspects of the applicant’s financials are investigated well before the final approval of a home loan.
The Approval Process
After carefully considering the factors and meeting the underwriter’s requirement, the underwriter evaluates and gives his/her approval. The underwriter first issues a conditional approval which necessarily certifies that the applicant is a good candidate for the loan. He/she may further specify certain conditions to be fulfilled, subsequent to which a final approval would be given. After this, the mortgage lender gets the value of the property appraised. An appraiser determines the value of the property and submits the report back to the mortgage lender. The report is then sent back to the underwriter who approves the report and gives his/her final approval. After this, the applicant’s mortgage is sanctioned within a few days.
Resource – Mortgages For Dummies
Important Tips to Speed Up the Underwriting Process
Honestly, there is not much that you can do to fast forward the process of underwriting. No underwriter would want the loan application they have audited to turn bad. Keeping this in mind the underwriter will go into specific details of every aspect of an applicant’s finances. But there are a few things that the applicant could do to expedite the underwriting process, namely, keeping their documents in order, being fast to respond to the request of their mortgage lender, and always submit supplementary details to clear out any questionable discrepancies.
Keep Your Documents in Order
If all your paperwork is complete and updated, it will help the underwriter in assessing your application better. All the required documents should be submitted in the prescribed format that would help in obtaining faster approval. The use of technology may be a big factor.
Be Fast to Respond
Even after submitting your documents, the underwriter might ask you to furnish a letter of explanation to get certain details. You should be proactive and submit the requested documents immediately to avoid any unexpected delays.
Submit Supplementary Details
You can submit details of unconventional large deposits. If you had a break in your employment history, you could furnish a statement stating the reason. It is very likely the underwriter will ask for information on these and it would be better to submit them beforehand. You may also inquire about the services of mortgage brokers who are well versed in the developments in the mortgage market to help you in your application process. The process of underwriting is indeed long and tedious but if you have all the documents in place then there is absolutely nothing that you need to worry about.
Final Thoughts on How Long Does the Underwriting Process Take?
Now that you have an answer to the question ‘how long does the underwriting process take? You should relax and prepare yourself. Ideally, it takes around a few days to four weeks and typically over a week for the loan to be finalized and approved. You can be prepared by working with your mortgage loan officer in handling all the necessary documents the underwriter will need to have the loan finalized.
[i] Guttentag, J. (2004). The Mortgage Encyclopedia: An Authoritative Guide to Mortgage Programs, Practices, Prices, and Pitfalls. New York, NY: McGraw-Hill Education.