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The underwriting process can sound intense and stressful. Afterall, your income, debt and assets are being closely inspected in order to determine whether you qualify for a loan and how much you can get. However, underwriting is nowhere near as scary as it sounds if you understand exactly what an underwriter does.
Essentially, underwriting is the process of verifying your finances before giving you a final approval for a loan application. This process is conducted in order to ensure that you will be able to make your mortgage payments on-time and in-full.
That way you are protected from the risk of foreclosure on a property you could not afford to buy, and your lender is protected from the risk of missed payments and is stuck trying to sell your property in order to recoup their investment. If your underwriter concludes you do not qualify, they have the power to deny your loan.
However, before we dive in, if you want to get the best mortgage financing with fully underwritten pre-approvals and mortgages, click the link below for a free strategy call to get started today.
Underwriting Dos and Don’ts
Before tackling the underwriting process, it is important to understand what you should and should not do while applying for a loan. These tips will help you qualify for the most you can while also helping the process go quickly and efficiently.
Do: Respond Quickly
Whenever your underwriter reaches out to you, answer as soon as possible. Whether they are asking for new documents, or an explanation of key elements of your finances, the underwriter needs you to get back to them before they can finish going through your file. So, do not take your time to respond because every minute you wait, is a minute your underwriter could have spent determining the loan amount you qualify for.
Don’t: Open New Lines of Credit
When you apply for a new line of credit, your underwriter will be able to identify it and it may put your application at risk because of its impact on your debt-to-income ratios. If you absolutely must open a new line of credit or take out a major loan during the underwriting process, make sure you talk to your underwriter about it before you do.
Do: Be Honest About Your Finances
You should never lie to your underwriter, after all they have access to all your income documents to verify anything you claim. So, just be honest. If you have missed loan payments in your history due to unexpected job loss or a sudden emergency, your underwriter will be much more capable of working with you to get around it if you tell them up front.
Don’t: Change Careers
If you can avoid it, do not change jobs in the middle of your mortgage application. Your underwriter is going to be calculating the amount you qualify for based on your current employment information and by changing careers you suddenly change your expected income and employment information. This means you will need a new job letter to verify your income, thus slowing things down.
Do: Get Pre-Approved
A pre-approval is an excellent tool when you are trying to secure a mortgage because it gives you access to a clear estimate of how much of a loan you qualify for while also securing a lower interest rate early.
Discover How To Apply For An Investment Property Mortgages With This Step By Step Guide
What Does the Underwriter Do?
Order an Appraisal
An underwriter will order an appraisal while working on your file in order to ensure that the value of the home matches with the price you are paying for the home. This allows you to be sure the amount you are taking out as a loan is appropriate and you are not taking on more debt than the home is worth, saving you money overall.
During an appraisal, the property you are trying to buy will be compared to comparable properties in the area to determine the value. In the event that value comes up short, you have the option to negotiate a lower price from the seller, contest the appraisal and have it redone, or move on the property and search for something else.
Confirm Your Income and Employment
An underwriter will require a variety of income and employment documents in order to confirm your ability to afford the home. These documents include things such as your last 2 years of income documents (such as your T4s or T1s), recent bank statements and a job letter from your current employer. This will help them match your reported income with your actual income.
Verify Savings and Down Payment
Your underwriter will look at your individual savings to make sure you have a sufficient down payment saved while also having a reasonable amount of savings in the event of a sudden financial emergency. At this time, they may also confirm any assets you possess that may be used as collateral on your loan if they are applicable.
Assess your Debt-to-Income Ratio (DTI)
Your DTI is a percentage that demonstrates how much you spend on monthly expenses compared to your income. This is used to ensure you have enough money to afford your monthly mortgage payments as well as your insurance and property taxes without foreclosing on the property,
Investigate Your Credit History
Your underwriter will pull your credit report and check your credit score to search for any previous overdue payments, bankruptcies, or overuse of credit. Your credit score reflects your ability to pay debt back on time. Depending on the type of loan you are looking to obtain, the minimum credit score you are expected to have may vary. For example, an insured mortgage in Canada requires a score of 680 or higher on average. A higher credit score will help you qualify for better interest rates on your loans.
Underwriting is a key process when you are trying to get a mortgage and while the majority of it happens without direct input from you as the buyer, it is always better that you are informed on the process so you can have a smooth experience with little-to-no hassle.