In the five circles of the mortgage process, underwriting is where you (the borrower) come face to face with the bank’s gatekeeper: the underwriter. The underwriter is the last major hurdle standing between you and closing the loan on your new home. Your lender’s underwriter decides if the mortgage application is a safe risk for the lender.
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As a borrower it should be your goal to impress the underwriter by following the steps outlined in the first three parts of the series on mortgages. For most lenders the pre-approval is directly linked to the underwriting process. Which means if the borrower has met the pre-conditions for the loan, then they should easily pass a thorough review of the application.
It is the underwriter’s job to vet the loan documents, investigate any errors, and find any inconsistencies. Upon doing so they will issue a list of conditions highlighting problems to be resolved for the loan to close. If the underwriter is impressed with application they will issue a “clear to close” in about one to three business days.
Mortgage Underwriting Dos & Don’ts
Do:
- Have all of your documents in order.
- Be patient.
- Follow through on any requests made by the underwriter.
Don’t:
- Get restless- Underwriting can take up to several weeks, but the actual review process is relatively quick.
- Apply for new credit- This can affect your credit score and raise red flags about how you treat credit.
- Quit your job- How will you pay your new mortgage?
- Suddenly get rich- Depositing money into your bank account from an undisclosed source like your employer’s payroll, or income from your small business, will also raise red flags. Ideally you want all the elements of your application to remain as consistent as possible. Try to avoid winning the lottery until after you close.
Mortgage Insurance
The underwriting process itself is pretty straightforward, and once the bank has analyzed the loan it may purchase insurance to protect itself from a default. This is known as private mortgage insurance.You too can protect yourself from default by purchasing home owners indemnity insurance. These insurance policies pay your mortgage in case of illness, death, unemployment or other circumstance.
Understanding Private Mortgage Insurance (PMI)
PMI coverage is based on several factors:
- Loan to Value (LTV)- The amount of money lent by the bank compared to the down payment made by the borrower. The higher the loan to value ratio, the more exposed the bank is to default, and the higher the cost of insuring that mortgage against risk. Private mortgage insurance is required for most loans with an LTV of more than 80%.
- Length of the mortgage term- The longer the term, the greater the cost of insuring the mortgage. That cost is then reflected in your payments.
- The type of mortgage- Refinances have higher insurance premiums than purchases. Cash out refinances are currently not supported by mortgage insurance.
- Credit score- Again with the credit score!
Paying for Private Mortgage Insurance (PMI)
PMI is usually handled through Borrower Paid Monthly Insurance (BPMI). Every month the cost of insuring the loan is added to your monthly mortgage payment until the LTV drops below 80%. At which point the borrower can, under the Homeowners Protection Act of 1998, submit a request to the lender and cancel their private mortgage insurance. There are alternatives to BPMI including Lender Paid Mortgage Insurance, Single Premium Mortgage Insurance, Split Mortgage Insurance, and FHA Insurance. Not every lender makes these options available to borrowers, but they can be great alternatives specific to your needs if your bank offers them. Want to get the ball rolling on your mortgage? Check out the SmartAsset calculator to see how much of a home you can afford right now.
Tips for Buying a Home
- Make sure your credit score is in good shape. With a high credit score, you can get lower mortgage rates, which translates to lower monthly mortgage payments.
- Talk to a financial advisor about how buying a home will factor into your larger financial plan. You want to ensure you can purchase a home without sacrificing your other financial goals. A matching tool like SmartAsset’s SmartAdvisor can help you find a person to work with to meet your needs. First you’ll answer a series of questions about your situation and goals. Then the program will narrow down your options from thousands of advisors to up to three fiduciaries who suit your needs. You can then read their profiles to learn more about them, interview them on the phone or in person and choose who to work with in the future. This allows you to find a good fit while the program does much of the hard work for you.
See the rest of the posts in this series:
Mortgages – Part 3: The Mortgage Application Process
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