What is loan underwriting?
What happens when you apply for a loan? To many consumers, the entire ordeal can seem like a maze of confusion, especially when it comes to critical elements like the underwriting process.
When all you really want is to get money for a big purchase or better your financial situation, dealing with such concepts may feel like more trouble than it’s worth.
Fortunately, this critical juncture isn’t as dense of a quagmire as it appears. Leverage these tips on how it works to guide yourself past the tricky parts and make a more informed borrowing decision.
Evaluating Your Suitability
Underwriting is the general term for the method your lender uses to decide whether to give you money. After receiving your loan application, the processor sends it to an internal or third-party underwriter. The underwriter puts your request and accompanying documents through a rigorous double-check.
In addition to verifying that you were truthful when you filled out the paperwork, the underwriter will
- Review your borrower history and past financial standing,
- Investigate your asset holdings, access to loan collateral and credit,
- Check out your employment status and background, and
- Review or order an appraisal of the property you want to purchase to ensure that it meets the lender’s preferred loan-to-value acceptability criteria.
As these factors demonstrate, the underwriting process doesn’t just evaluate you — so don’t take it personally. It also tries to determine whether you’re a good match for the mortgage in question.
In other words, it’s all about presenting yourself accurately and choosing a lender that services your particular niche. For instance, a mortgage lender that offers homebuyer loans might prohibit its products from being used to fund investment property purchases.
USDA Loans and Underwriting
The underwriting process can take new depths of complexity when you apply for a USDA loan. These government lending products impose more stringent guidelines on underwriters and applicants, so it’s important to learn the ins and outs before applying.
For instance, potential borrowers typically have to sell their current homes, plan on personally occupying the new property, and hold valid United States citizen or permanent resident status.
Underwriters for USDA loans also look at factors like your disability and Social Security benefit track records and student loan payment habits. Want your alimony or child support money to be counted as a form of qualifying income?
You’ll need to have at least a 12-month payment history and three years of future payments scheduled. Self-employed borrowers usually need to provide at least two years’ worth of 1040 tax records, and traditionally employed borrowers also require a 24-month history.
Sailing Through the Underwriting Process
Underwriting isn’t always as smooth as borrowers hope but staying aware of what’s going on and being open to communication can help move things forward.
For instance, your underwriter might ask for supporting documents or clarification about specific incidents, such as missed credit card payments and large-sum transfers. They might also contact your broker, employer, or bank.
When you’re willing to respond quickly and proactive about keeping in touch with your lender for updates, the underwriting ordeal will play out much faster.