What to Expect from Mortgage Underwriting
Mindy Jensen has been buying and selling homes for more than 20 years. Her preferred method of investing is the flip buys a house, moves in, makes it beautiful, sells it after two years to take advantage of the Section 121 Capital Gains Exemption, and starts the process all over again. She is currently working on her ninth live in flip. She also the co host of the BiggerPockets Money Podcast.
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Mindy LOVES real estate. She has taken part in syndications, private lending, and deals involving seller financing. She owns a single family rental, a short term rental, a mobile home park, a co working space, and her most recent purchase a caboose!
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Loan underwriting may sound mysterious, but chances are, you already experienced a similar (albeit simpler) process for your pre approval letter. While pre approval makes you competitive to sellers, it is not an official guarantee from your lender. Underwriting makes it official. It’s the final step for your lender before you close on the property.
Because underwriting is typically a hands off part of loan approval, many home buyers and property investors don’t know what to expect from this financial process. There are steps you can take to ensure this goes as smoothly as possible because it’s important to know what’s happening behind the scenes.
What is underwriting?
Mortgage underwriting is the process during which your lender (whether a bank, broker, or credit union) decides if you qualify for the mortgage that will buy your property. Because you’re asking to borrow such a large sum, the lender isn’t going to hand it over without some thorough investigation into your financial background. From there, they will decide to extend a loan. This is all based on the documents you submit per their request and, yes, you will need to resubmit what you already gave them during the pre approval process. They will then assess the property itself with an appraisal and title search.
After gathering all the information they need, they will determine the risk of lending to you and either approve or deny you that whopping home loan. From here, they’ll ensure that you have income to support your monthly mortgage payment as well as the funds for the down payment, closing costs, and some leftover for any worst case scenario maintenance or costs.
If you have any derogatory marks on your credit history, you may need to submit a statement that explains why that’s the case. It helps your lender understand the objective value of your new home. Once all the proper documentation is received, your lender will order an appraisal, which will ensure that the property is worth what you’re paying (or more) because the property itself acts as collateral in case you default on the loan.
Typically, the lender will order the appraisal, and you (the buyer) are involved only when the appraisal report comes in. The cost of the appraisal is often packaged up in your lender fees, so no action is required from you to choose, hire, or pay an appraiser. In fact, appraisals are required to be an “arm’s length” transaction, meaning neither you nor the lender can “choose” the appraiser.
“Title” specifies who has rights to the property. During underwriting, your lender wants to make sure that they (and you) are protected from any defects in the title that give another party a claim to the property. This could be other mortgages, a lien, an easement, or even a missing heir.
Typically, your lender will employ a title company to perform this final title search. And they will purchase title insurance to cover their stake in the property. You (and/or the seller, depending on your contract) should also purchase title insurance to protect yourself from any of these rare title problems.
Approval: This is straightforward. You’ve been approved, and no further action is required. Congratulations!
Denial: It’s rare that you will be denied this late in the process unless your financial situation has changed since you applied for pre approval. If this is the case, find out why you were denied so you can take any necessary steps to work toward approval. This could include funding a larger down payment or changing the type of loan you are pursuing.