What Exactly is the Mortgage Underwriting Process?
If you’re a first-time homebuyer, you might find yourself intimidated at the prospect of applying for a mortgage. You understand there’s a lot of paperwork to wade through, and you may also fear that you might be denied a home loan, which could dash your dreams of homeownership. However, the more you know about the process the better equipped you will be when it’s time to apply for a home loan.
Simply put, the mortgage underwriting process is when a mortgage underwriter analyzes your entire financial situation to assess how likely you will be able to make regular mortgage payments with your lender. They will look at your income, credit history, and your debt obligations to better understand if you’d be at possible risk of defaulting on your loan, or if you’re a sound investment.
Why do lenders need the loan underwriting process?
Mortgage lenders – credit unions, banks, and private mortgage companies – must meet requirements developed by the Consumer Financial Protection Bureau (CFPB) to ensure fair and transparent treatment of borrowers. To treat you fairly, lenders also need to protect their interests with a robust approval process before they can fund your loan. The process protects borrowers and lenders from bad loan practices.
What documents do you need to provide for the mortgage underwriter?
Every lender has a specific process, but in general, you need to provide the following seven documents for pre-approval:
- Most recent tax return: It’s okay if you don’t have a hard copy. With your signed permission, your lender can request your tax return.
- Proof of income or W2: If you work a regular payroll job, your employer issues a Form W2 to document your compensation from that job for the previous year. You should provide copies of your two most recent W2s for this process. If you don’t receive a W2 because you work cash jobs or are self-employed, you’ll be asked to provide proof of cash or direct deposits.
- Statements from your bank accounts, investment accounts, life insurance, and retirement accounts: Your lender will ask for statements for any account in which you have money deposited to gain a picture of your total financial position.
- Gift letter: If you plan to use gift funds from a friend or family member to purchase your house, you will need a gift letter to explain the source of the funds. This is a simple letter you can prepare yourself.
- Photo ID: To prove your identity, you’ll need to provide a copy of your driver’s license, passport, or other government-issued ID. A work Visa will also work.
- Rental history: You may be asked to prove you paid rent for the past year. This can be in the form of duplicated or canceled checks, or you can ask your landlord to provide a documented payment history.
- Credit report: Along with other documents, your lender will pull a specific credit report for mortgages. This report is different from a consumer report that you could request for free. You may need to explain any credit issues to your mortgage lender so they can determine if there are any errors on your report.
4 steps to expect with a typical mortgage underwriting process
- Completing the application: This process can involve filling out a form online, meeting face-to-face or by phone, or using a lender’s app. Typically, the online application is the most efficient way to apply, just make sure you submit all the necessary information.
- Processing your application: Your lender’s processing team will review your documents and order the home appraisal and any additional documentation necessary for the underwriter. The lender’s processing ensures your file is as complete as possible before they submit it to the underwriter. Your lender may contact you with questions to verify the information you provided. When all documentation is complete, your loan package goes next to the underwriter.
- Mortgage underwriting: This process will determine if your loan application will be approved or denied. With a complete package, underwriting can be accomplished quickly. Once you have final approval, your loan package moves on to the lender’s closing department.
- Closing: Ideally, your lender will submit your approved loan package to your real estate attorney or title company as quickly as possible so you can review all of your closing documents in advance of closing. It’s important to go over all closing disclosures to ensure the numbers are correct before closing.
How long does it take for mortgage underwriting and final approval?
Typically, most lenders can complete the underwriting process in 2 weeks, but it can take as long as 30 days. This, of course, can depend on how active the real estate market is and how busy lenders are during that time.
The mortgage underwriting process may seem scary or complicated at first but stay the course. A good lender will do their best to protect both the borrower and the bank and issue a loan that will be paid back in full. Now that you are familiar with the mortgage underwriting process, you will be ready to provide your lender with all of the necessary documentation to get your loan underway.