Borrowers have to undergo an underwriting process before they can secure a loan to purchase a real estate property. This process helps lenders determine whether you are credit-worthy or have the capacity to repay the money you are borrowing. Appraisal of the house is also crucial to make sure lenders can recover their money if you default on the loan. 

Getting the help of a seasoned real estate agent is vital during the underwriting process. The agent will ensure you put forward a reasonable offer and avoid the mistake of offering more than the property appraisal. Learn more about the underwriting process in this blog post. 

Real Estate Underwriting: Explained

The lender takes some risk and uncertainty when lending money to someone who wants to purchase a house. Imagine lending to a borrower who might not pay back the money he owes you. That is the risk that the lender assumes in this business. However, a lender can lower the risk in offering a home loan if borrowers go through an underwriting process. 

Part of the underwriting process is verifying the borrower’s identity and assessing his financial situation. The mortgage underwriter will check various factors, such as the borrower’s employment history, monthly income, financial assets, liabilities, etcetera. Nowadays, many lenders use software with statistical models for risk assessment. 

The underwriting process will lead to the conclusion whether a borrower can take the loan or not. It will also determine the interest rate of the home loan. 

How Mortgage Underwriters Make an Assessment

A mortgage underwriter will look for indicators that a borrower has the ability to pay back the loan. If you are a borrower, you can take some steps to help the underwriter to consider you creditworthy and increase your chances of getting the mortgage. 

Keeping a good credit score is vital when applying for a home loan. The lender will set a credit score requirement, and you have to meet that to qualify for the mortgage. Moreover, borrowers with excellent credit ratings have the advantage of negotiating for a lower mortgage interest rate. 

You also have to maintain a healthy debt-to-income ratio. You must keep it at 43% or below to indicate to the underwriter that you do not have many debts. A high debt-to-income ratio is a tell-tale sign that you will have difficulty paying back the home loan. If you are taking a mortgage, make sure to pay off your existing debts before applying. 

Property Appraisal in Real Estate Underwriting

Besides checking the borrower’s financial situation, a mortgage underwriter will appraise the property that the borrower is trying to purchase. The house serves as security to the mortgage, reducing the risk for the lender in case the borrower defaults on the loan. 

The underwriter will request the mortgage applicant to provide a report from a licensed appraiser evaluating the property. The appraisal report will include pictures of the house and its amenities. Of course, the vital part of the report is the value of the property and an explanation of how the appraiser valued it that way. 

The property appraisal is crucial for lenders when deciding to approve a borrower’s home loan application. The loan amount is also determined by the monetary value of the house. The borrower cannot take a higher loan amount than the value resulting from the property appraisal. The lender will always think about how he can recoup his money if ever the borrower opts for a loan default. 

Different Results of Real Estate Underwriting

The underwriting process can lead to different conclusions. If the mortgage applicant receives conditional approval, it means the lender considers your capacity to get the loan but you need to provide additional documents to get fully approved. 

A “suspended” mortgage application means you have not provided the required documents. You should read the paperwork requirements and submit them to the lender. If your application is “denied,” it means you need to work on your financial situation and increase your creditworthiness. 

Borrowers should ensure they are in good financial standing and provide all the documents required by the lender. When you meet all the requirements, the lender will surely approve your mortgage application. 

You can fast-track the underwriting process if you get all the necessary paperwork ready. Prepare your bank statements, credit reports, tax returns, pay stubs, and insurance information. You can also get approved more quickly if you make a down payment for the loan. 

Endnote

Hopefully, this blog article has helped you understand the real estate underwriting process. Borrowers need to go through the underwriting process when applying for a mortgage. There are necessary documents that loan applicants have to provide to get approved by the lender. A property appraisal and credit check are also part of the underwriting process.