Mortgage Underwriting: What is it and how long does it take?
You are the perfect borrower. You did your research and have your documents prepared ahead of time. You sorted your way through the disclosure package and signed your required documents. You provided your intent to proceed, and your appraisal is ordered. You loan file gets handed off to processing and underwriting while you just kind of… wait.
I’m sure you are honest and trustworthy, but your lender is going to verify everything you provided. Sure, they have your tax returns, but now they’re going to ask the government for the same documents and make sure they match. Then they will go to your banks and make sure all that money you say you have is, indeed, in your bank account. They will go through this verification process with just about everything you provided. This includes verifying your credit card debts, any other loan amounts or payments, your bank deposits, your investment and retirement account balances, and your living history.
What is underwriting?
It’s the underwriter’s job to decide whether or not you qualify for the loan. They’re like a detective – they’re going to investigate your personal finances & the property to assess the lender’s risk. Then they compare these things to investor or company guidelines and decide whether or not to approve the loan. They are concerned with three things – Capacity, Credit, and Collateral.
- Capacity – Do you have the willingness and ability to repay this debt? Can you actually afford to pay back this loan?
- Credit – Do you have a history of paying back your other debts? Do you pay these on time and without issue?
- Collateral – Is the fair market value of the property enough to cover the debt? Does it meet the guidelines required for the loan product?
*** add some detail about what’s required to do this****
How long does mortgage underwriting take?
It’s also a slow process. This takes days. In most cases, you’ll be sitting on the sidelines while the processor and underwriter do their thing. Instead of sitting idly by, you can use this time to check a big item off of your list – home owners insurance.
Mortgage underwriting process
The loan processor and underwriter may pass your loan back and forth a few times. The underwriter will need clarification on something. The processor will come to you and ask you to explain things like a large transaction or provide verification that, yes, you did close that old Circuit City credit card. Once the processor has what they need, the file goes back to the underwriter for review.
As they give you a full blown examination, just know that obscure, nitpicky things are going to come up here, and it’s part of the process.
Collecting initial documents for underwriting
Your lender is going to ask you for a million things. Half of those things are documents. Most of these requests will be specific to your personal finances & your specific loan product. But out of the gate, almost everyone is asked to provide the same thing –
- Tax returns – You’ll need at least the last year, and in most cases the last two years.
- Bank statements & pay stubs – They may start by asking for the previous two months, but have the last 12 months on hand. If you get an actual pay stub, start saving them now!
- Debt statements – Again, have 12 months of statements ready for any debts like credit cards, student loans, auto loans, or any personal loans.
- Asset statements – Make sure to have statements ready for any investment accounts that you plan to liquidate and use as cash to close.
- Previous addresses & history – Your lender will need 2 years of living history. If there are any gaps (ex. traveling for an extended time or living with family) they’re going to want an explanation. They may also ask for contact info to confirm your history, so make sure you have a way to contact your old landlord or building manager.
- Employment history – Finally, creating that LinkedIn page has paid off. You’ll need your job title, start and end dates, company address, a company telephone number, and in some cases contact info for HR or your immediate supervisor. The lender will need to verify you did, indeed, work at a Hot Dog on a Stick two years ago.
- Marriage certificates – Less common, but they may ask for them if you are buying with a spouse.
- Divorce certificates – They may ask for them to prove you are NOT buying with a spouse.
- Identification – You should have expected this, but you’ll need an ID. It has to be valid, so if you’ve been delaying that trip to the DMV, do it before you apply for your loan. There’s nothing like an emergency visit to the DMV while trying to close your mortgage.
Again, I am a huge fan of Dropbox. Get your statements as they come in every month and organize them into a Dropbox folder. If your lender has an online portal, you know where everything is. If your loan officer asks for things via email you can send them a link.
Pro tip – You don’t want to email your loan officer all of your actual documents – You don’t want your sensitive information sitting in their email inbox for who know’s how long. If the government can lose millions of background checks and fingerprints, your loan officer’s email inbox is definitely not an impenetrable fortress. It’s not perfect, but by sending a link to a Dropbox folder (or Google drive, etc.) you can revoke access to those documents once your loan closes and reduce the risk of identity theft.
Verifying your information
*** now that they have your information, they have to confirm it’s accurate ****
The biggest factor in getting a home loan is your income. The mortgage lender’s biggest concern is whether or not you’re actually going to pay this loan back. A steady stream of income is a the biggest component of that. They also want to make sure that you’re not spending _too much_ of that income on housing. They use a [debt-to-income (DTI)] calculation to make sure that once you’re paying your mortgage you’ll have enough money left over to pay for essentials.
A lot of people don’t realize this, but the lender is going to verify your employment as well. This is to make sure that nothing has changed during the loan process and you will continue to earn your income. In some cases they’ll use a third party service to do this. But there’s a chance they just call your employer up and ask for human resources.
So what happens if you don’t have a typical job? Say you’re retired, you make money day trading the stock market, or you drive Uber full time? The lender is going to ask for a bunch of information to try and understand how much you make & and how consistent it is. It doesn’t make getting a mortgage impossible, it just means more paperwork.
After income, your debt payments are the next largest factor when calculating your Number. If you make $10,000 a month, but $8,000 of it goes to paying a giant pile of credit card debt, your Number is going to be pretty low. Lenders are concerned with the cash you have leftover from your current debt payments & whether or not that will be enough to cover your new home loan.
The thing is, lenders aren’t so concerned with the total amount of debt you have (or even your net worth). They’re concerned about the _minimum amount you have to pay monthly_ to meet your debt obligations. If you have $23,000 in student loans that cost you $250 a month that is going to do way less damage to your Number than $10,000 in credit card debt with a $450 monthly payment.
*****they also need to make sure there aren’t any obligations they’re missing***
Verifying assets and cash to close
Many people only focus on saving for their down payment. It’s often the biggest chunk of money you’ll need to save, but it’s not the only cash you’re going to need to get a loan. We’ll call the total amount of money you’ll need your “Cash to Close,” which includes a few things –
- [Down payment] – this is the big one. This can be anywhere from 0% to 25%+ of the home value.
- Taxes, fees & closing costs – we have an article that goes in-depth into the different fees and cost, but there are a number of things you’ll need to pay for during the process, and they add up quickly. Including lender fees, this can be anywhere from 3% to 5% of the total home value.
Verifying the home value
***called collateral, why it’s important, link to *******
Conditional approval from underwriting
Your loan comes back from the underwriter and you have a green light. Congratulations! This is a huge step, but don’t party too hard yet – there’s a few things that need to happen between this point and signing your closing documents.
Your underwriter will give you what’s called a “conditional approval.” That means that you are approved for the loan as long as you meet certain criteria, called closing conditions. Some common closing conditions are –
- Having a home insurance policy by the time of closing
- Title work – You aren’t the only one with some work to do. The lender may have to finish researching the title of the property. Ideally this is completed prior to this stage.
- Having your cash to close ready
- Updated bank statements, investment account statements, and debt statements – if your loan took longer than 30 days to close, you may need to provide the most recent statements for all of your accounts
- In some cases, you’ll need a “minimum reserve” of cash. An example of this is a loan product that requires you have 6 months worth of payments saved after closing your loan.
Once these final items have been collected, your loan file goes back to the underwriter one last time. This time it should be a (relatively) quick turn around, you should get a response within a day. If all is well, you’ll get the ultimate stamp of approval – you are clear to close your loan.
Clear to close on your mortgage!
Once you are clear to close you need to DO NOTHING. Don’t do a thing –
- Don’t open a new credit card.
- Don’t start buying furniture on your existing credit cards.
- Don’t get a personal loan so you can start prepping for that bathroom remodel.
- Don’t start funneling money around between your bank accounts.
If there is ANY major change in your credit score it can keep you from closing. If your minimum payments change on your credit card, or you have a new loan payment, it can affect your DTI ratio and keep you from closing. If you transfer money between banks, and the money doesn’t show up in your account in time, it can (you guessed it!) keep you from closing your loan. Ideally you consolidated your funds prior to your application to avoid issues here. Any major purchases can wait until after you leave the closing table. Seriously, do as little as possible.