When it comes to buying a home, there’s quite a bit of work you have to do before you get the keys to the front door. Appraisal, loan processing, settlement agents… these are probably all terms that used to put you to sleep, but now keep you up at night.
You’ve finally submitted your home loan for approval, and it’s been sent to “processing,” and then it will have to be approved by an “underwriter.” What does “processing” even mean? What’s an underwriter? What factors determine the decision? Here’s a quick guide to help you find out.
What is underwriting?
When it comes to mortgages, underwriting is the process your mortgage lender uses to decide whether the risk of offering you a mortgage loan is acceptable. The risks that your underwriter will evaluate typically fall under the three C’s of underwriting: credit, capacity, and collateral. After evaluating, your underwriter will make the decision to approve, suspend, or deny your loan
But first, it’s important to understand the two types of underwriting: automated underwriting and manual underwriting.
The Difference between Automated and Manual Underwriting
Automated underwriting involves the use of a completed loan application to generate a computer-generated underwriting decision. An advantage of this technique includes requiring less documentation from you, the borrower. Typically, the only documentation you’ll need for this step is basic information like proof of annual income, your current address, and your social security number. Buyers who get approved through automated underwriting typically receive superior rate offers in comparison to borrowers who are manually approved.
Manual underwriting is often used in situations where the borrower is unable to qualify for an approved loan through an automated system. This technique requires an underwriter to look beyond a credit score and manually review your financial documents and payment records, such as rent, utility, and insurance payments. Some of the disadvantages of this method include typically higher mortgage rates and downpayments in comparison to loans approved through automated underwriting. This method generally takes longer and requires more documentation from borrowers.
So, with that information in mind, here are the three parameters your underwriter will use to evaluate your mortgage loan application:
The 3 C’s of Underwriting
Your credit score is a number that indicates to lenders your ability to repay a loan. This score is derived from your credit history and reports. Even if your credit score says nothing about your actual financial situation, like your income, savings, or net worth, it can be an incredibly important factor in whether or not you can get approved for a mortgage, especially when it comes to automated underwriting. If you have a low or nonexistent credit score, you may have to opt for manual underwriting or finding a first-time homebuyer program.
Your underwriter will also look at information to prove that you’re in a healthy spot financially. This information includes your annual income, the amount of cash you have saved, and an examination of any debt or financial liabilities you may have.
Your underwriter will also assess the collateral risk of your mortgage. This involves the underwriter determining the value of the home you’re buying. This is where the importance of an appraiser comes in. An appraiser is an individual who assesses the monetary value of your home based on things like condition and location. An appraisal is important in order to ensure buyers are not borrowing more money than the house is actually worth. Your underwriter will also take your down payment into account. The bigger your down payment, the better, as this will make the loan appear less risky in the eyes of lenders.
Now you know exactly what’s happening when your loan is being processed. What’s next?
Closing with Care
After your mortgage gets approved, you’re in the home stretch… but, there’s still plenty of work to do. The most important part of the homebuying process comes at the end—the closing. In Kentucky, anyone can handle a real estate transaction. No licenses or trainings are required. Closing is a critical step in the homebuying process in which legal issues can, and do, arise. When matters come up such as survey defects, title defects, or terms of mortgages, only a licensed attorney is able to handle those issues in a qualified way.
At Borders & Borders, real estate closings are our specialty. We’ve represented thousands of individuals buying and selling real estate in Kentucky. From small home purchases to million-dollar commercial and residential closings, we handle every client with the utmost care. Contact us today to make sure your real estate closing is in good hands.