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How to Understand Real Estate Underwriting

By RealtyBiz News | January 20, 2023
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Mortgage rates are twice as high as a year ago. If you're thinking of buying a home, getting the best possible mortgage rate is critical.

Underwriting is a key part of the mortgage process. It determines whether your home loan application gets approved. It affects your mortgage rate.

Understanding real estate underwriting can improve your chances of getting a competitive mortgage. Learn more here about real estate underwriting and get a step closer to your new home.

What Is Real Estate Underwriting?

Underwriting is an essential part of buying a home. It's a process the lender uses before approving your mortgage loan application. It helps the lender determine how risky the loan would be.

Underwriting examines your financial situation and how much the real estate you want to buy is worth. It includes verification of:

  • Your income
  • Your assets
  • Other debts you have
  • The value of the property

For straightforward loan situations, the underwriting may be automated. Otherwise, the underwriter is a person who works for the lender.

How Underwriting Works

The underwriting process can take anywhere from a few days to a few weeks. A complex transaction will have a longer underwriting process than a simple transaction.

Submit a Mortgage Application

The first step is submitting your mortgage application. You'll need to provide documents such as:

  • Valid ID and Social Security number
  • Recent pay stubs
  • W-2 or I-9 forms from the past two years
  • Federal tax returns
  • Recent bank statements
  • Details on long-term debts like car or student loans

Your loan officer, mortgage broker, or home lending advisor sends this information to the underwriter.

Many lenders have an online application process. You may have the option of submitting your home loan application in person or over the phone.

The Underwriter Reviews Your Application

The underwriter considers several factors when evaluating your mortgage application. One of the most important considerations is your credit history. The underwriter also looks at your capacity to repay the loan.

Another factor the underwriter evaluates is whether the value of the property you want to buy provides enough collateral for the loan. Collateral is an asset that helps secure the loan. The lender can use it to recover any unpaid balance if you default.

Get an Appraisal

The underwriter needs an appraisal of the property. The responsibilities of underwriters include verifying that the loan amount you want matches the value of the property. An appraisal considers aspects of the property such as:

  • Size
  • Condition
  • Features
  • Location

The price of comparable homes in the neighborhood also affects the appraised value.

If the appraisal determines that the home is worth less than the asking price, your mortgage application may not be approved.

Get a Title Search and Title Insurance

Before the lender will approve your home loan application, they need to confirm who the current owner of the property is. The lender also needs to know if the property has any outstanding claims or liens.

A title search examines public records to determine the property owner. It can find issues including:

  • Liens
  • Title claims
  • Unpaid taxes
  • Unpaid HOA dues

These debts follow the property, not the owner. Finding any problems before you buy the home protects you and the lender.

The title insurer will give you an insurance policy after the title search is complete. Title insurance reflects the condition of the title. It protects against issues affecting ownership that may come to light later.

A lender's policy is a requirement. Adding an owner's policy to protect your own investment is a good idea.

The Underwriter Makes a Decision

After reviewing the information related to your mortgage loan, the underwriter will make a decision. The underwriter can approve, deny, or suspend your application.

Approval means you can move forward with the mortgage and buy a home. Approval may come with conditions. This means you need to provide additional information before scheduling your closing with the lender.

If the underwriter denies your loan application, you should ask for more details. This can help you find ways to address the issues before your next application.

The underwriter will suspend your mortgage application if you didn't provide enough information for a complete evaluation. You'll need to give the underwriter whatever additional documentation is necessary for them to make a decision.

Common Concerns in Real Estate Underwriting

Some issues in your credit or income history can cause problems for real estate underwriting. For example, underwriters may interpret non-sufficient funds (NSF) charges as a sign of poor financial management.

A low credit score is another red flag. If your loan does get approved, you'll have to pay a higher interest rate. Bankruptcy, foreclosure, and a high level of existing debt are also causes of concern.

Gaps in your employment history or changing jobs frequently may cause the underwriter to ask for more information. You may need to explain the circumstances behind these situations. Lenders want to see a stable income stream.

Improving the Underwriting Process for Your Home Loan Application

Working to improve your credit score and using good money management techniques can help you avoid problems during real estate underwriting. You can take several other steps to help the process go more smoothly.

Keep Your Debt Stable

Keeping your debt-to-income ratio stable during underwriting is important. Avoid taking on new debt or closing credit cards. You should also avoid making major purchases that lower your assets.

Respond Quickly to Requests from Your Lender

Your lender may contact you to ask for additional documents. Responding to these requests quickly will help the underwriting process move along. Be sure to provide all the information the lender requested.

Be Honest about Your Financial Information

The underwriter will know if your application includes false information. If you have issues in your financial history, explain them to the underwriter. For example, the underwriter may be more lenient if you explain that a missed payment was due to COVID-related unemployment.

Moving Forward with Buying a Home

Real estate underwriting is an essential part of buying a home. It verifies your income, assets, and level of debt. It establishes the value of the property and who the lawful owner is. Underwriting approval means you can move forward with your real estate transaction.

Establishing good credit and maintaining a steady income are two strategies for improving the underwriting process. Being honest with the lender is also important. Replying quickly to requests for more information will help the underwriting process go faster.

If you have more questions about buying a home, we have the answers. Check out the rest of our home-buying articles to learn more about real estate transactions.

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