The underwriting process in real estate evaluates your ability to pay back your mortgage. To do this your lender asks for many documents to help them assess your financial situation. From a high level, they want to know:
- The borrower’s credit history and debt load
- Whether the market value of the house matches the purchase price
In a sense it runs the entire home search, starting even before you look at your first house until closing on the deal. You may look at the process as starting after the contract is signed, including the appraisal, title search, and detailed examination of the borrower’s financial status.
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How Long is the Underwriting Process in Real Estate?
In a sense, the underwriting process takes the entire house search. The first person you should talk to is a mortgage lender to see how much you can afford. Most people, though, think of underwriting as the time the lender pours over your financial records. This usually takes about a week.2
Why Does it Take so Long?
For some people, this can be very quick, but for most of us, it takes a while. So, why does it take so long? Common reasons include:
- A complex financial history
- Ownership of a business or other property
- Issues with credit reports
- The house you are buying is unique and hard to appraise
- Title issues
These are just some things that add to the complexity of the underwriter. While most issues are straightforward and easily resolved, some issues require time to evaluate.
How to Speed Up Underwriting
The best way to speed up the process is to make sure your financial records are complete. The better prepared you are the easier it is for the bank. If it is easier for the bank to verify all your financial history then it will be a quicker process for you.
Prequalification for the Underwriting Process in Real Estate
The first step is prequalification. Knowing where you stand financially from the beginning will help you make good decisions later.
- It determines what kind of mortgage fits your situation and how much you can afford
- Do this before you begin your home search
During this step, the bank looks at your basic financial situation and runs a credit check.
Income verification and Documents for the Underwriting Process in Real Estate
Income verification is the most tedious part of the process for you. Be prepared to provide:
- Banks statements
- Tax returns
- Documentation about debts, such as credit cards or car loans
- Documentation about assets, such as other properties you own
A loan processor reviews your information, and then the bank issues you a prequalification letter. This states the amount the bank is willing to loan based on the information you provided. A preapproval letter shows the seller you are a serious buyer. You have the financial resources to buy the house. At this point, you are ready to find and submit a contract on a house.
Tax Returns
Your lender wants to see your tax returns to get a more complete understanding of your income. Specifically, they want to know if you write anything off and why. Generally speaking, if you aren’t paying taxes on it the bank won’t let you use it as income. The most common write-offs include:
- Unreimbursed business expenses
- Schedule C losses
- Schedule E losses
Tax documents also show if you have any farm income, pay alimony, or received unemployment compensation. All of these affect your ability to get a mortgage.3
Bank Statements
Underwriters want your bank statements because they want to know how much money you have in the bank, and how long it’s been there. They want to:
- Make sure you have enough money in your account to cover the down payment and closing costs
- Know where the money in your account came from
- See how much you are earning
- Use the information to calculate your debt-to-income ratio
Bank statements are very important for your lender. It gives them a better understanding of your financial situation.4
Letter of Explanation
The underwriter wants a letter of explanation to explain something about your financial records. These are common, and they are nothing to get too worried about. Common issues that they want explained are:
- A job change
- A gap in employment
- Large deposits into your account
- A source of self-employed income
The bank wants you to explain anything that seems strange. The best thing to do is to write a letter directly addressing the concern. If you aren’t clear about what they are asking, consult with your loan officer, and they should be able to help you write the letter.5
Do Underwriters Check Credit Again?
Some underwriters do check your credit again before the closing, and some do not. However, you should assume that they will, and here is why:
- debt-to-income balance shifting
- Making new, large purchases
- Opening new lines of credit
Basically, they want to know if you did anything to increase your credit risk. Put another way, they want to know if you can still afford the loan.6
Appraisal for the Underwriting Process in Real Estate
Once you submit an offer on a property your lender conducts an appraisal of the property. The bank wants to know if the market value of the house is consistent with the offer you submitted. It does this by looking at:
- The property’s condition
- Sales of comparable houses in the area
Appraisals for most houses run a few hundred dollars, but for larger, more complex properties they can easily go over one thousand dollars.
Title Search for the Underwriting Process in Real Estate
The title search ensures that the house doesn’t have any legal claims against it. A title company performs this search to make sure that the property can be transferred. They research the history of the property looking for:
- Mortgages
- Claims
- Liens
- Easement rights
- Zoning ordinances
- Pending legal actions
- Unpaid taxes
- Restrictive covenants
Then, the title insurer issues a policy that guarantees the accuracy of its research.
Decision for the Underwriting Process in Real Estate
At this point, you are close to closing, and the bank issues a decision on your mortgage application. The best outcome is unconditional approval, but that rarely happens. You will likely receive one of these three outcomes:
Denial
In this case, you need to understand the specific reason for the denial.
- If the lender states that you have too much debt, you can pay down credit cards or other loans before you continue your house search
- If your credit score is too low, check the report for mistakes and take steps to improve your credit
While you won’t be able to continue with this transaction, you can easily fix these, and other denial reasons.
Suspended
Banks usually suspend your application because of missing data. They may not be able to verify your employment or income. Other issues may be verification of a gift. Basically, they will suspend the application for any financial regularities until they get documentation.
Approved with Conditions
If you diligently work with your loan processor approved with conditions is the most likely outcome. They almost always want documentation to clarify some financial matters. They often want:
- Additional pay stubs
- Tax forms
- Proof of insurance
- Copies of marriage certificates
- Copies of business licenses
These are just some examples of additional documents they may want. Sometimes it can be as simple as you missed signing one of the application documents.
What is the Final Review?
The final review is the last step in underwriting before a loan is approved. Most of the time the bank conditionally approves the application, and so the borrower must submit some paperwork or corrections. Once those conditions are met the underwriter fully approves the borrower for the loan.
