What Goes Into Underwriting My Mortgage Loan?
Whether it’s your first homebuying experience or fifth, some aspects of the mortgage process can seem confusing, especially something called ‘underwriting.’ You’ve likely heard the term at some point, but maybe you’re not quite sure what goes into the underwriting process. Below, we’ll explain underwriting and all of the steps involved so you’ll go into the home buying process with a better understanding of how it all comes together!
The Mortgage Process
If you plan to take out a mortgage when buying a new home, there is a specific process that lenders follow. You will likely work with your lender at the outset to become pre-qualified, in which the lender will use your basic financial information and credit score to provide you with an estimate of how much home you can afford. This is an important step, as it helps you and your agent determine a price range with which you’re comfortable. However, this is just the beginning.
After finding a home you’d like to purchase, you’ll submit a full mortgage application with your lender. As part of this process, you’ll provide personal contact information, tax returns, pay stubs, asset statements, insurance information, current mortgage or rent information, and more based on your individual financial situation. Once your lender has all of the necessary documents in hand, your lender will submit your file to underwriting to determine your risk level as a borrower.
The Underwriting Process
Your lender likely has a team of underwriters, each of whom reviews mortgage applications with a fine-toothed comb to determine a borrower’s level of risk of defaulting on a mortgage. The underwriter will take all of the information from your mortgage application, focusing heavily on your financial background, credit report, and the home you’re planning to purchase. The underwriter is responsible for weighing the risk based on these factors, and typically follows guidelines set forth by Fannie Mae and Freddie Mac.
5 Things Underwriters Focus On
The underwriter’s job is to glean all of the necessary information from your application and utilize it to determine your risk of default before approving your mortgage application. While they will review all aspects of the application, there are five main things they’ll focus on during the process. They include:
- Income- Your employment information and pay stubs will be verified to ensure that your financial information is accurate. It’s important to ensure you’re earning enough income to cover your mortgage payment with additional cash to spare.
- Credit- Your credit report is a critical piece of the puzzle and explains your financial background and how responsible you are with your finances. Several factors about credit will be reviewed, including your overall score, payment history for other bills, and your debt-to-income ratio (DTI).
- Assets- Your financial accounts will be reviewed to ensure you have adequate liquid assets for a down payment, closing costs, and reserves to pay your mortgage in the event you’re temporarily out of work.
- Appraisal- When buying a home and obtaining a mortgage, an appraisal will be ordered to determine the market value of the home. If for some reason the appraisal comes in under the asking price of the home, either the seller has to lower the home price or the buyer has to pay cash for any amount over the appraised value to move forward with the mortgage process.
- Down Payment- The underwriter will review your financial accounts to determine the origin of the down payment you’re planning to use. Your lender will verify the source of the down payment, as it cannot come from a loan. Also, if any money is gifted to you, there must be a note from the gift giver stating it is, in fact, a gift.
Fortunately, your lender will walk you through the entire mortgage process, and as long as you provide the necessary documentation, underwriting should run smoothly. The more prepared you are upfront, the better, as it will prevent delays once your application has been submitted. If you’re ever unsure about the information needed, your lender is a great resource – asking questions early will ensure you’re prepared when the time comes to submit your application!
When you’re ready to begin the mortgage process, our team of local industry experts at C&F Mortgage is here for you. Get in touch with us today to begin your home buying journey!