Getting a mortgage: What Is underwriting in real estate? Everything buyers need to know is below.
Starting the loan process can be intimidating, but it’s a crucial part of getting on the property ladder. One of the most nerve-wracking parts of the loan process is underwriting. This is because underwriting is out of the buyer’s hands, and approval depends on the underwriting process. However, there are some steps you can take to make sure underwriting goes smoothly. Here is everything you need to know about the underwriting process when applying for a home loan.
What Is Underwriting?
Underwriting is the part of the lending process when your lender determines if you qualify for a mortgage to buy your property. Think of it as a thorough investigation into your financial background. A team of underwriters working for your lender looks into your finances and the property you plan to purchase. The underwriters verify the information you gave in your loan application, such as income, debt, and assets. They then assess the home you want to buy by ordering an appraisal and title search. Once they’ve gathered all the information they need, they decide whether to extend a loan or not.
What Is Included In The Underwriting Process?
- Financial review: During the financial review, the borrower submits the required documents required by the lender, such as recent pay stubs, tax returns, and account statements. This enables the underwriter to ensure that you have the income required to support your mortgage repayment. You should also be able to show your funds for the down payment and closing costs.
- Appraisal: An appraisal estimates a home’s value based on the sales price of similar properties in the area. Your lender will order the appraisal, and the cost is typically included in your lender fees. As the appraisal is an “arm’s length” transaction, neither the buyer nor the lender can choose the appraiser.
- Title search: A title search helps to identify who has the right to the property. During the underwriting process, your lender must determine that they’re protected from defects in the title. This helps to avoid any other parties claiming the property due to mortgages, liens, easements, or missing heirs.
- The final decision: Once the underwriters have all of the information they need, they make their final decision. Typically at this stage in the process, very few people are rejected. However, if your financial situation has changed, or you’ve made a large purchase, you may be rejected.
5 Way To Ensure the Process Goes Smoothly
- Provide documents in a timely manner: Be sure to provide any documents requested by your lender promptly. This will help the underwriting process to go as quickly as possible.
- Make a realistic offer: The appraisal is an integral part of the underwriting process. If the appraisal comes back lower than your agreed loan amount, your lender will not approve your loan. You can avoid this by making an accurate offer price.
- Understand the conditions of your loan: Certain loan types, such as VA and FHA loans, require the property to be in a “livable” condition. This means it must have sufficient heating, safe roofing and electrics, appliances, a functional kitchen, and a usable bathroom. Properties that don’t have this may fail to appraise.
- Do not mislead your lender: Underwriting is a fact-checking process of all of the statements you’ve made on your loan applications. If you’ve deceived your lender, this may create an issue during the underwriting process. It’s crucial to be completely honest in your loan application.
- Don’t make any large purchases: Large purchase before you close on your loan can create red flags during the underwriting process. Avoid buying any big-ticket items, opening new lines of credit, or missing any payments. All of these things could be detrimental to the underwriting process.