After your documents are sorted and prepared by a loan processor, the next step in the mortgage approval process is mortgage underwriting. This step is arguably the most important in the process because it ultimately determines whether your home loan is approved or denied. In this quick guide, we’ll cover everything you need to know about the mortgage underwriting process so you can enjoy hearing the three best words in the mortgage industry: “clear to close.”
What is Mortgage Underwriting?
Mortgage underwriting is a process used to assess risk and ensure a borrower meets all of the minimum requirements for a home loan. Mortgage underwriting professionals use specific guidelines and specialized software programs to determine levels of risk and your ability to pay back the loan. Lenders typically use one of two underwriting processes for mortgage loans: automated and manual. Here’s a quick rundown of both processes:
Automated Underwriting is a computer-generated process that can gather information and determine your eligibility for a home loan, typically for conforming loans, just by inputting a few pieces of information, such as your social security number. Even with an automated process, you are still required to provide documentation to the underwriter as needed. Though the system is able to process loans quickly and determine whether your loan is approved or denied, a mortgage underwriter will review your documents and verify the decision.
Manual Underwriting is done by a person and is used for specific loan situations including certain FHA loans, VA loans, or if you have a complicated income and/or debt situation.
What You Can Do to Help the Process
For the most part, the cards are out of your hands during this stage of the mortgage approval process. However, there are several things to avoid during this time to ensure you have a smooth underwriting process:
- Changing your place of employment – Though this may be out of your control, it’s best to wait until after you’re approved to change jobs so that your loan officer can verify your employment.
- Apply for new credit – Remember, your credit can and will be pulled at any time up to the closing of the loan, so any changes to your credit can affect your chances of being approved.
- Making any large credit purchases – Hold off on purchasing new furniture and appliances for your new home, as these types of large purchases can spike your debt-to-income ratio, your credit utilization, or both, which your loan officer will be analyzing.
- Making any significant changes to your bank account – Transfers between accounts and payroll deposits are generally okay, but any significant change to your account that may be unclear to a loan officer, such as a large deposit or withdrawal, needs to have an explanation.
Any major changes in personal income, assets, or debt can affect your chances of being approved for your home loan. If you’re unsure of how an action could affect your application, be sure to ask your loan officer.
The Underwriting Decision
Once the underwriter has reviewed your application and documents, they then decide the status of your loan. The best outcome is an approval, however, you might receive one of these three decisions:
Approved with Conditions: your application is approved, but it can come back with conditions that you’ll need to provide the loan officer, such as additional pay stubs, tax forms, proof of mortgage insurance, or proof of insurance.
Suspended: Don’t be alarmed – this decision generally means there are some documents missing from your file, your underwriter couldn’t verify income or employment, or they need clarification on some information. The lender will tell you if you’re able to reactivate the application by providing the additional information.
Denied: Not all hope is lost if your mortgage application is denied. A denied application doesn’t mean you can’t get a mortgage, it just means there may have been a hiccup in the process. Be sure to ask your lender to provide the reasons why you were denied so you can determine a way to resolve the issues found.
Once you have met the underwriting requirements and are approved, you’re ready to move on to closing, or settlement, where the final paperwork is signed, money is transferred to the appropriate parties, property ownership is transferred from the seller to the buyer, and you legally commit to your mortgage.