What is Underwriting and Why Does It Matter?
Underwriting is the mortgage lender’s process of determining the risk of lending money to you. The bank, credit union, or mortgage lender has to decide whether or not you can pay back the home loan before deciding whether to approve your application. A home loan is a detailed process involving applying for the mortgage, receiving a loan estimate from the lender, processing the loan, waiting for approval, and finally closing on your home. The role of an underwriter is incremental in the entire process. Here are the responsibilities of an underwriter when helping process your home loan.
· Review your credit history. Underwriters look at your credit score. They look at your overall credit score and search for things like late payments, bankruptcies, overuse of credit, and more.
· Request an appraisal. Your underwriter will request an appraisal to ensure that the lender's amount for the home matches up with the home’s actual value.
· Verify your income and employment. Your underwriter will ask you to verify your income and employment situation.
· Look at your debt-to-income ratio. Your DTI is a percentage that tells lenders how much money you spend compared to how much income you bring in. You can calculate DTI by adding together your monthly minimum debt payments and dividing it by your monthly income. An underwriter analyzes your debts and compares them to your income to ensure you have enough cash flow to cover your mortgage payments, taxes, and insurance.
· Verify your down payment and savings. The underwriter also looks at your savings accounts to make sure that you have enough savings to supplement your income or to use it as a down payment at closing.
The faster all of the necessary documentation is in the underwriter's hands, the smoother the process will be, so it's essential to get all requested documentation to the lender promptly. During the underwriting process, it's a good idea to respond to your lender’s requests actively. Doing this will help move the underwriting process along smoothly. Remember that it is not a good idea to apply for any new credit lines during underwriting.