If you’re looking to borrow money, you need to understand the loan approval process. This is the process where a lender makes an assessment of how risky it will be to lend you money.
The process varies depending on the type of financing, but may include items such as tax returns and pay stubs. But what does the process really mean for you?
Underwriting
Underwriting is the process your lender goes through to determine your risk level as a borrower. This includes a review of every aspect of your finances and history. They’ll look at your credit report, review any documents you provide, and ask questions. They’ll also consider your employment history, and verify your income.
They’ll evaluate your debt-to-income ratio (DTI) and examine your assets, including checking to see if any are liquid. The underwriter will also assess the size of the loan and whether the homebuyer has sufficient cash reserves.
An underwriter’s primary job is to verify that the information provided in the application is accurate and supports the loan’s terms. This helps them make a decision about whether the borrower can afford the monthly payments.
The underwriter will often issue conditions or requests for more documentation before approving the loan. If this happens, it is best to respond right away so the loan can continue to move forward. This may include providing additional pay stubs or bank statements, providing explanation letters for large deposits or job changes, or supplying verification of alimony or child support payments.
Sometimes a mortgage will be approved with conditions, which means the underwriter needs more information to be certain the loan is sound and can be closed without any problems. This is a common situation for homebuyers, but it is also a reason to be careful not to open new lines of credit or add any debt until after your loan closes.
Appraisal
Whether you are buying a home or refinancing your mortgage, a property appraisal is an essential part of the process. It helps your lender confirm that the property’s value is reasonable and prevents you from paying or owing more than the home’s actual value. An inaccurate or incomplete appraisal can delay or derail your mortgage transaction. The good news is that there are steps you can take to prepare for a successful appraisal.
Before your appraisal, you should do some research and be ready to answer any questions the appraiser may have. You should also be able to demonstrate any improvements you have made, such as remodeling projects and home upgrades. A great way to do this is by creating a file that includes all the relevant documentation, including sales receipts.
Once the appraisal is complete, it will be sent to the mortgage company’s in-house underwriting department for review. During this phase, the underwriter will evaluate all of the information in your loan application and review the property’s value. If the underwriter disagrees with the valuation, they can reject your application or make other changes to the loan terms. If the underwriter agrees with the valuation, your loan will be approved. If not, the underwriter can require you to pay additional fees or can even deny your mortgage application altogether.
Closing
After the underwriter has approved your loan, it is up to the closing department to finish up all remaining details of the transaction. Usually, the lender will work with the company that will close your loan to set up a day and time to do so. You will sit down at a table with the company and sign numerous documents. This is a crucial part of the process, so it is important to read all of the documents carefully. If you do not understand a certain aspect of the loan, or find a mistake in the documentation, you should contact your lender immediately.
You may also need to provide additional documentation such as proof of homeowners and title insurance. The cost of these will be worked into your closing costs. You should get an idea of how much your closing costs will be from the Loan Estimate, which you will receive within three days of submitting your application.
One of the most common reasons for closing delays is when a borrower’s financial situation changes after they are pre-approved for their mortgage. This could include a change in employment or income. The underwriter based their approval on the job and income information submitted with the loan application, so if these changes were to occur, it could cause a delay in your closing date.
Documentation
Documentation is the process by which lenders obtain financial information from borrowers to determine whether to lend money. This information is typically verified using various sources, including the borrower’s personal and business tax returns. Documentation also includes statements of current income, assets and liabilities, and paystubs. This information is then analyzed to ensure that the borrower can afford the loan.
The documentation process can seem time consuming and frustrating, but it’s vital for a lender to have the necessary information in order to make a decision. The loan application can be a lengthy document, and the required documents vary from lender to lender. It’s important to check email, voicemail and postal mail frequently so that you don’t miss requests for more information. Then, respond as quickly as possible.
It is crucial for loan agreements to be documented so that the intention, terms and expectations of both parties are clearly stated in writing. This will reduce the chances of misunderstanding and conflict in the future. More and more institutions are turning to document automation software to help them create loan agreements with greater speed and accuracy. A robust solution like Windward offers well-designed templates and conditional logic to generate perfect documents in seconds. It’s a great way to streamline the loan application process while saving on long-term storage costs.