Understanding the mortgage underwriting process

Understanding the Mortgage Underwriting Process

Like most people who buy a home, you may need a mortgage to finance the purchase of your next property, and this means filling out an application, providing documentation and waiting to see if you’ll be either preapproved or approved. This process is called underwriting, which is a mortgage lender’s method of evaluating your creditworthiness and the risk of lending money to you. Here’s everything you need to know about the underwriting process, step by step.

Are You Ready to Be a Homeowner?

Buying a home is one of the most exciting events in your life and is likely to be the most expensive purchase that you will ever make. Before you make a commitment, make sure you are ready.

Avoid the pressure to buy a home that you cannot afford. Here are some things to consider:

Are you ready to be a homeowner? It is critical that you consider whether you have saved enough money to support a down payment in addition to your other debts. You must have job stability and a steady income.

How long do you plan on living in your home? Real estate is not always an investment. No one can predict what will happen with your local housing market. If you plan to sell your home in the next few years, realize that the property may not increase substantially in value or may have actually lost value. You may ultimately owe more to pay off your mortgage than your home will be worth.

What is your estimated monthly payment for the home? In addition to the monthly payment for principal and interest, you will have to pay for taxes and insurance and possibly homeowner association dues. If your down payment is less than 20%, your lender may require that you pay the added expense for mortgage insurance.

What are the other costs of owning a home? Be realistic about the costs of owning a home like heating and cooling and other utilities. You will generally need to budget for repairs and routine maintenance of your home, especially if you buy an older home.

What can you afford? Be confident that you can make the monthly payments. Have a financial plan and make a budget. Do you have a steady source of reliable income to pay your mortgage should your interest rate increase in the future? Consider how many long-term debts you have such as car or student loans, as well as credit card bills.

Have you talked with a housing counseling agency? Housing counselors can be very helpful, especially for first-time home buyers. The U.S. Department of Housing and Urban Development (HUD) supports housing counseling agencies throughout the country that can provide free or low-cost advice. You can search online at HUD‟s web site, or you can call HUD‟s interactive voice system. This contact information can be found in the Appendix of this booklet.

Types of loans and programs

Shopping for your loan is probably the most important step in your home-buying process. Mortgage brokers and lenders have a wide variety of mortgage products. The type of loan product and your interest rate will not only influence your total settlement costs but will determine the amount of your monthly mortgage payment.

Sample Mortgage Loan  Document Checklist

W-2 forms (previous 2 years)

Pay stubs ( 2 most recent)

If self-employed- Two years signed tax returns with all schedules & YTD profit & loss

Employer name & address (2 year history)

Bank Account(s) Statements (recent 2 months)

Statements for 401(k)s, stocks other investments (most recent)

Photo Identification (valid driver's license or passport)

Divorce Decree and Separation Agreement (if applicable)

Additional items below for home purchase and refinance requirements. (If applicable)

Letter of explanation (signed & dated)of any inquiries on credit report

If selling your current home- contract for home being sold

For eligible Active Military & Veterans- DD214 & Certificate of Eligibility

 

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