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After completing and submitting the application, you are now at the mercy of the credit insurers, who are responsible for investigating all the details of your financial life and home. These underwriters will usually never know you or see you in person, but will base their judgment primarily on the documents you have submitted.
If red flags are revealed when you take out the mortgage, your application could be denied. So learn what underwriters look for and how to avoid rejection.
What does an underwriter do?
A mortgage loan insurer is the person in charge of the final request for approval of your mortgage. They will evaluate all of the documents related to your application and help the lender determine if you are qualified for a loan. This includes getting your credit reports, applying a home appraisal, checking your income, employment and assets, and double checking the source of your down payment.
If any questions or additional information is required, the underwriter will work with you and your lender to do everything possible to make a final decision.
How long does the underwriting take?
Lending is usually the longest part of the mortgage process. Generally, it takes around 30-45 days from the start of underwriting to the completion of the loan. However, a number of factors can affect this schedule, including the complexity of your financial situation, whether additional documentation is required, and how many loan applications are currently on the lender’s plate.
Other key factors related to home sales such as: B. whether the Rating is too lowIf repairs are required before the sale is closed, or sellers need more time before moving to a new home, mortgage processing can also be delayed.
How often does an underwriter turn down a loan?
If you’ve been denied a mortgage in the past, don’t feel too bad. It happens quite often. In 2019, around 8% of applications for single-family homes built on land were rejected. Keep in mind that this number may be even higher after the pandemic as many lenders have tightened their qualification standards.
Whether you have been turned down in the past or are hoping to avoid this situation when you finally apply, the key is to understand why an underwriter might reject a mortgage loan application and to avoid these issues when you apply.
Reasons for being rejected by an underwriter
Here’s a closer look at the most common reasons a credit insurer will turn down a mortgage application.
One of the most important factors a mortgage insurer evaluates is your credit history and score. Your credit-worthiness determines how great the risk is for potential lenders. A good credit means you are likely to repay your loan on time, while a few dips mean you end up being on hold or even defaulting on payments.
That means your creditworthiness will play a huge role in whether or not you will be approved for a mortgage. While it is possible to qualify for some government-backed mortgage loans with creditworthiness as low as 500, most traditional lenders require a score of at least 620. However, a score of 740 or higher is preferred and will help you get the lowest score possible Interest rate available.
Even if your credit rating is good, certain negative events in your credit history can cause the insurer to pause. For example, if you had a debt collection account or have filed for bankruptcy in the past, the underwriter may not approve the loan.
Also, keep in mind that even if your creditworthiness was good when you applied for your mortgage, any hits to your score that occur during underwriting could result in a rejection. So be sure to keep up with all of your payments and not take sudden steps such as paying. B. Apply for a car loan, a new credit card, or close a credit card until the mortgage is approved.
High debt-to-income ratio
Another important factor that mortgage lenders consider is yours Debt-Income Ratio (DTI) . This is a measure of how much of your gross monthly income is used to pay off debt, expressed as a percentage.
For example, let’s say you make $ 5,000 a month before taxes are deducted. You have a credit card payment of $ 150, a car loan payment of $ 300, and a student loan payment of $ 550 due each month. That would give you a DTI of 20% (total monthly debt of $ 1,000 divided by gross monthly income of $ 5,000).
Most lenders require your DTI to be below 43% when they include all of your debt plus the mortgage amount with your gross monthly income. If your debts go beyond that, they likely won’t approve you for a mortgage.
Shaky job history
Lenders want to know that you have stable income to finance your mortgage payments or independently.
Some situations that could result in your mortgage application being denied include layoffs or recent job changes, especially if you move to another field. If you have recently changed jobs, it may be helpful to include a letter from your employer confirming your position and salary.
Your sources of income also play a role. If a good chunk of your income comes from commissions, bonuses, or other sources outside of a regular salary, this could signal to the insurer that your income is unstable and they may need a longer proof of income. This can also result in your mortgage application being rejected.
No paper trace
When it comes to your income, assets, and down payments, underwriters expect detailed records of where the money came from. For example, you must have W-2 for the past two to three years and pay slips for at least the past 30 days that demonstrate your employment and confirm your details on your application.
You will also need bank statements showing your bank account and your investment balance. If you have been given some or all of the money for your down payment, you will need a gift letter explaining where the money came from and confirming that it is indeed a gift and not a loan (which is not allowed) .
In addition to your personal financial situation, the underwriters will also review the condition and value of the property you are buying. An important number is that of the house estimated market value. Lenders don’t want you to borrow more than a home is worth; If at any point you need to sell the property, it is important to have enough money to pay off the mortgage.
It may be okay if the rating is a little lower than expected. However, if the appraisal is well below what you want to pay for the property, there is a good chance your mortgage application will be denied or you will have to pay the difference out of pocket.
Problems with the property
If you’re looking to buy a fixer-upper, keep in mind that some lenders must meet certain real estate requirements in order to secure funding. Some loans, such as Federal Housing Administration (FHA) Loans, come with a set of specific property standards for safety, security, and solidity that must be met in order to qualify. So if the inspection report shows up for the home you are eyeing for, for example with roofing or electrical problems, you could be denied a mortgage.
Next steps after a rejection
If you recently went through the mortgage application and were denied a loan, it is important to find out why. Your lender is required by law to explain the reason for the rejection of your loan application, which is detailed in a disclosure letter. If you don’t understand the rationale in the letter, contact your lender for a more thorough explanation.
Once you understand the reasons for your application being rejected, you can resolve the issue. Some steps you can take to resolve common problems include:
- Improve Your Credit Score. If you have been denied a mortgage because of a low credit score or negative reviews on your credit reports, it is important to clean up your balance before you apply again. Start with Check your creditworthiness and obtain a free copy of any credit report AnnualCreditReport.com. Check them for errors that could affect your score, and deny all mistakes You find.
- Pay off some debts. Spend the next few months paying all your bills on time (payment history is 35% of your score) and paying off any revolving debts. Once your credit is back in “good”, it should be easier for you to get approved.
- Lower your DTI. Reducing your outstanding debt will not only improve your credit score, but also lower your DTI. Ideally, your monthly DTI should be less than 36% and no more than 43% when considering the mortgage balance. So if you have credit cards or loans that are devouring too much of your income, work on getting rid of that debt before you take out a mortgage.
- Increase the savings. If you have been denied a mortgage because your down payment was insufficient or you did not have enough assets to secure the loan, it is important to add to your savings. When you have more cash in the bank, you become a less risky borrower in the eyes of the underwriter. You can also qualify for a higher loan and / or a lower interest rate.
- Choose another property. If there are problems with the home you’re trying to buy, such as an inflated price tag or costly damage to repair, it may be time to consider moving to another home. It can be hard to let go once you’ve found a property that you really liked, but you will likely be better off financially if you opt for a home that is easier to finance.