Most people in today’s world buy homes with the assistance of a mortgage. Typically, a home purchase is contingent on the buyer securing financing, and, at closing, the seller will be disbursed a check by the lender for part of the proceeds of the sale.
But lenders don’t give mortgages to just anyone who wants one. They take a great deal of time and effort to assess the risk of giving a mortgage to a borrower.
This requires that they look closely at the buyer’s creditworthiness and the property’s value and condition to make that determination. This is done through a process called mortgage underwriting.
What is Mortgage Underwriting?
Mortgage underwriting is the process by which a lender assesses the risk of lending money to a borrower. It requires verification of the information that the potential borrower has put on their mortgage application and assurance that the property is sufficient collateral for the loan.
Prior to the underwriting process, a loan officer or broker will collect many documents to support the information on the application. The underwriter will then consider all the documents collected and determine if the borrower is a good risk for the loan. They do this using a set of guidelines established by the lender. C
onventional lenders most often use the guidelines set by Fannie Mae (Federal National Mortgage Association) or Freddie Mac (Federal Home Loan Mortgage Corporation). These government agencies buy the loans from lenders and sell the securities to investors.
What Does the Underwriter Do to Assess Creditworthiness?
The lender’s underwriter will look at a borrower’s lending risk using many different variables. These include
- The borrower’s credit score
- The borrower’s income and debt
- The borrower’s employment history
- Whether the home will be a primary residence
- The appraised value of the home
- The structural condition of the home
The underwriter will look at all of this to assess the risk of lending to that individual using that property as collateral.
How Long Does Underwriting Take to Complete?
Depending on how long it takes for a borrower to compile all the necessary documents, how streamlined the lender’s processes are, and how much of a backlog that lender may have, underwriting a mortgage can take anywhere from a few days to several weeks.
But the underwriting process also relies on other things to be completed aside from the borrower’s documents and verifications, including a full appraisal of the home, title documents, surveys, and potential special reports and repairs. Consequently, a mortgage can typically take one to two months to close.
The Underwriter’s Decision
After a thorough review of the application and supporting documents, the underwriter will decide whether the borrower fits the lender’s risk profile, based on whatever guidelines that lender uses. The underwriter may approve the loan application, clearing the property to close, they may deny the application, or they may come back with other options.
If a borrower has been denied, they can work toward fixing the problems and reapplying at a later date. The underwriter may simply need more information and will either approve the application with conditions or suspend it until more verification is forthcoming. Either way, it will require that the application be reconsidered before closing can take place.
How Strict is Underwriting?
It depends on the criteria. Most conventional lenders are very strict because they sell their mortgages to federal agencies that require adherence to very stringent guidelines. For mortgages backed by FHA, VA, or USDA, the guidelines are a little more lenient depending on other criteria. In addition, specific lenders can add additional criteria depending on their ability to keep up with demand.
In 2020, nearly over 9 percent of all borrowers were denied mortgage financing. Fortunately, other alternative lenders in the mortgage landscape use different underwriting criteria when assessing lending risk.
These lenders will qualify borrowers based more on their assets than their income and credit scores. Others base their decisions more on the property itself since it is the main collateral for making the loan. These alternative lenders can offer far more flexible underwriting criteria, with faster approval and closing than conventional lenders.
If you have had difficulty qualifying for a mortgage under conventional underwriting guidelines or have questions about alternative mortgage options, contact the professionals at NonQMHomeLoans.com.
We offer a broad range of mortgage products from conventional mortgages to private investor loans. Contact us at (800) 413-0240 or apply for a loan easily here.
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