If you buy a house and then later default because you couldn’t afford the payment, the mortgage lender is stuck with the property. Since banks aren’t real estate agents, they don’t want the headache of dealing with bank-owned properties. For that matter, lenders are extra careful when approving applicants for a mortgage loan.
When you submit a home loan application, you'll work closely with your loan officer throughout the process. The loan officer will take information for your application, review the Loan Estimate with you and answer questions. But when it comes to approving your home loan application, the loan officer steps aside and gives your loan package to the bank’s underwriter.
In many cases, you will never meet or see the underwriter. This is the unseen entity in the process, but this person plays a crucial role. This individual ensures the stability of your financial profile and assesses your risk.
If you’ve purchased a home in the past, you might be familiar with the underwriting process. But if you’re buying your first home, here is what you can expect.
Do you have resources to purchase the home?
One responsibility of mortgage underwriting is to ensure you have sufficient resources to purchase a particular property. You will have to submit supporting documentation about your earnings and assets. When you apply for a mortgage, you will receive a Loan Estimate from your loan officer, which provides information on the loan program, your interest rate, the loan amount, and your estimated closing costs and monthly payment. If you decide to proceed with the loan application, you’ll provide the bank with various pieces of information.
The underwriter will need information about your earnings, which includes your most recent tax returns (two years) and 30 days of paycheck stubs. The underwriter also needs information on current debts, such as student loans, auto loans and credit card balances. You’ll authorize a credit check and he’ll comb your credit report to learn how much you owe other creditors. If you receive income from other sources like alimony or child support, or if you’re required to make child support payments, you’ll also provide this information so the underwriter can evaluate your complete financial profile.
Since getting a mortgage requires use of your own funds for the down payment and closing costs, you’ll also provide the bank with your bank statements for the past 60 days. The underwriter reviews your bank accounts to make sure you have enough in reserves to afford mortgage-related expenses. If you don't have enough in reserves, you’ll need to explain the source of your down payment and closing costs. For example, will you use proceeds from the sale of a current house as down payment, or will you receive a gift from family?
Do you have an acceptable payment record?
Having sufficient income is crucial to getting a mortgage. But even if you have enough income and a sizable savings account, the bank may not approve your loan if you have a poor payment history. The lender pulls your credit report to see whether you pay your bills on time, or whether you have past due accounts.
As a general rule, you cannot have more than one 30-day late payment in a 12-month period. This doesn't mean you won’t get approved for a mortgage with more than one, but you will need to provide the underwriter with an explanation.
Information about the property
The underwriting process is more than an assessment of your income, assets and debt. It also involves assessing the property. Once you decide to buy a house and the seller accepts your offer, your bank will send a home appraiser to the property. The appraiser will walk through the property and take note of the home’s condition, and then use comparable sales for the area to determine the property’s worth. The appraiser submits an appraisal report to the bank. Before the loan can proceed, the bank must confirm that the sale price isn’t more than the home’s value.
How long does the process take?
The length of the underwriting process depends on the lender. If the lender has several loan applications ahead of yours, from start to finish it can take as long as 45 days to close on a mortgage. On the other hand, if you’re working with a smaller mortgage lender, or if the bank doesn’t have as many home loan applications, you can possibly close in a shorter amount of time.