After going through the process of looking at properties, applying for a mortgage loan, putting offers down, and getting an offer accepted, it can be tempting to sit back and bask in the glory of imminent homeownership. You’ve just done a heroic amount of work, after all!
However, once your new home has been appraised and the appraisal has been sent to your potential lender, you’ll find yourself onto the next step of many in the homeownership process: your loan moves into a phase called underwriting.
As a borrower, it’s very helpful to understand the underwriting process, including how long it usually takes and the different types of documents your lender may ask you to produce. There are several proactive steps you can take during this phase to keep your loan moving along through the process, bringing you that much closer to the day you can actually move into your new home.
If you’re currently waiting to get full approval for a loan, or have been researching the mortgage application process and wondering “What does it mean when a loan is in underwriting?,” keep reading to learn more.
What is Underwriting?
Underwriting is the process that banks, credit unions, and other mortgage lenders go through to assess the risk involved in lending you money after you’ve submitted a loan application.
Lenders want to make sure you’ll be able to repay the money they lend you. So, this process involves looking at your credit and financial background (which means you’ll need to submit several documents to confirm your identity), proving your income, and declaring any long-term debts such as car payments and student loans that you’re currently on the hook for.
Here are the four basic steps to the loan approval process:
- Preapproval. The lender will run a check on your finances, including credit history, income, and assets, to see if you’re qualified for preapproval for your mortgage loan.
- Appraisal. Once you’ve put an offer on a house, the lender will want to appraise the property to make sure it’s within the bounds of what you can reasonably afford. This can cost anywhere from a few hundred to over a thousand dollars.
- Title search. The lender will contract a title company to research the house’s history to verify that it can be legally transferred.
- Decision. The lender will issue a final verdict. Your loan may either be approved, denied, suspended (meaning the lender needs more information), or approved with conditions.
How Long Does the Underwriting Process Take?
The approval of a mortgage loan usually takes anywhere from three to six weeks, though this can vary widely from case to case. The length of time a loan spends in underwriting is affected by a number of factors, including:
- The type of loan you’ve applied for
- The type of lender you’re working with
- The current state of your finances and credit history
For instance, if your credit score is under 700 and you have a lot of outstanding debts, the process may take several weeks or longer. On the other hand, if you have a high credit score and income, you may only have to wait a few days.
Automated Underwriting vs. Manual Underwriting
There are two categories within the underwriting process: manual and automated.
Automated underwriting is a computerized process that uses algorithms and programs to analyze your information. The computer will parse your documents thoroughly to determine whether you meet the lender’s qualifications for a loan. This method is preferred by most lenders since it all but eliminates the risk of human error and streamlines the underwriting process.
Manual underwriting is when one or more human experts go over your file by hand. This method is usually used only for files that need a closer look or more personalized judgment, such as thin credit histories or high debt-to-income ratios. The manual method is also employed at the end of the underwriting process as a final check before your loan approval is finalized.
Tips for the Underwriting Process
The wait for your mortgage loan to be approved can feel interminable. Fortunately, there are some steps you can take before submitting your application and during the underwriting period to keep the process moving.
- Build your credit. Before submitting your application, make sure your credit score is as high as possible. According to the Federal Housing Finance Agency, only 1.9% of mortgage approvals in 2020 went to borrowers with a credit score under 660.
- Maintain your current debt. Once your application is in, avoid opening any new lines of credit or taking on any new debt until you’re approved. Doing so can make the underwriting process take much longer.
- Keep in touch with your lender. Make sure to monitor your email closely and always be available any time your lender reaches out to you. You may need to submit additional documents, and promptness in doing so will be rewarded with a shorter underwriting period.
- Be upfront about your finances. There’s no point in lying to your lender or attempting to misrepresent your income, assets, or credit history. If anything in your financial background stands out or looks concerning, be sure to include a detailed note explaining the situation. Being honest and transparent will do a lot to assuage any doubts your lender may have about approving you.
The Bottom Line
Fortifying yourself with ample research and patience is the best way to approach the loan underwriting process as a borrower. You’ll feel much less anxious during the often-lengthy process if you know what to expect before diving in.
This guide should cover the essential aspects of underwriting. However, if you’ve read this article and still find yourself asking, “What does it mean when a loan is in underwriting?” it’s time to check in with the professionals.
Contact the team at Associates Home Loan and set up a consultation today.