What Happens in Underwriting?
Underwriting is a crucial step in your home-buying process. It can be the deciding factor of whether or not you get your loan near the end of the mortgage process – so it’s important to know what goes on behind the scenes, and how to help underwriting go as smoothly as possible. Let’s dive into the specifics of underwriting so you know what it is, how it’s done, and how to be prepared for a fast, stress-free approval on your way to your dream home.
First things first: What is underwriting?
Underwriting is the process that mortgage lenders go through to assess the risk of lending you money for a loan. When you take out a mortgage, there are several factors that go into approval. The process is meant to ensure that the loan in question – if approved – will be paid back over time. When a loan is denied, it is usually because a detailed look into an applicant’s credit history, income, and financial assets appeared too risky to afford the loan payback.
How does underwriting determine risk?
There are three C’s that are evaluated in the underwriting process, to determine the risk of mortgage loan.
- Credit – Credit history paints a picture of how previous debts have been repaid. Underwriting looks at how much debt has been accumulated, how long it takes to pay back, and the consistency of past payments.
- Capacity – DTI (debt to income) ratio refers to how much money is spent compared to how much is brought in. It’s a strong indicator of your ability to manage monthly mortgage payments, based on spending and income.
- Collateral – This is where appraisals are done to find out how much the home you want to buy is worth in case you default on the loan.
How to prepare for the underwriting process
The more prepared you are for the underwriting stage of home buying, the quicker you can pass into the homeowner’s stage. You will need the following documents ready to go, so it’s smart to have them organized before applying for a loan.
- Government issued I.D.
- Recent pay stubs
- Bank account information (checking, savings, CDs, retirement accounts)
- W-2s from about two years
- Tax returns
- Any additional income information like bonuses, child support, pensions, etc.
Having all necessary documents ready ahead of time will speed up the underwriting process and help avoid delaying your loan approval. It’s also a good idea to check your own credit information ahead of time to see any potential red flags. Try and get your DTI ratio (36% or lower is ideal) down by paying down any remaining debt. Finally, remember that a higher down payment means less risk for your lender – which makes you an even more appealing candidate for the loan.
At VRM Lending, we strive to make the loan process as smooth and simple as possible. We’re here to help guide you through each step of the way, to help you finance your dream home. Contact us today to start your home-buying journey.