What Is Underwriting & How Does It Impact My Refinance?

What Is Underwriting & How Does It Impact My Refinance?

Written by Jeanette Arnholt
Article • 01/31/2022 • 10 minute read

What Is Underwriting & How Does It Impact My Refinance

The mortgage process is filled with small details that you’d never really need to concern yourself with unless you’re a mortgage processor. However, the underwriting process is a crucial element of mortgages and refinancing, so having a baseline understanding is essential.

Let’s take a look at everything there is to know about this component of mortgage processing so you can have more of a foundational comprehension of how your loan comes to fruition.

What Is Underwriting?

Underwriting is essentially the process that dictates whether or not your loan can get approved. It’s an umbrella term that refers to a few different assessments in which your lender verifies your assets, income, debt, property details, and other criteria.

While this process occurs behind the scenes, you’ll still be involved if your lender needs you to answer questions or provide additional documents.

What Does an Underwriter Do?

When you submit your original loan application, a mortgage underwriter looks at your documents to determine how much of a risk you are to the lender if they decide to give you a loan.

They’re looking to see how likely, or unlikely you are to be able to pay back the loan on time without default.

The underwriter helps the lender decide whether or not the loan should be approved. While this might seem like it’s only for the lender’s benefit, an underwriter also focuses on making sure that you are not taking on a loan that you won’t be able to afford.

So how does an underwriter assess all of these factors?

Order an Appraisal

An appraisal is an unbiased professional opinion of a home’s value by a qualified appraiser. It ensures that the lender is not giving the borrower more money than the home is actually worth. Your underwriter will order an appraisal to make sure that everything lines up.

Just because the lender orders an appraisal doesn’t mean it’s covered. In most cases, as the borrower, you are responsible for the appraisal fee at closing.

Order a Title Search

Along with the appraisal, an underwriter will also order a title search to confirm that the property you’re hoping to buy is free from outstanding claims. While this might not need to be done for a refinance, it may be ordered by a lender just in case.

A title company that conducts title searches will look at public records to see the property’s history and make sure there aren’t any outstanding dues, debts, or claims on the home. These might include unpaid electric bills from a past owner, unpaid construction costs, or a title claim.

Like the appraisal, title searches are usually paid by the borrower at the time of closing.

Income and Employment Verification

The lender needs to know, in good faith, that you’ll be able to pay off your monthly payments throughout the life of the loan. To do this, they need to check your income and confirm that you are employed with a regular paycheck.

Self-employed people can still own homes, but it can sometimes be difficult if their income is sporadic. Your underwriter can assess your situation and see if you’re still a good candidate.

Check Your Credit History

One of the most influential factors in terms of mortgage qualification is a strong credit score with a strong credit history. Underwriters will check your score, pull your credit report, and check for potential red flags such as missed payments, bankruptcies, or credit overuse.

Every lender differs, but for conventional mortgages, you typically need to have a credit score of at least 620. With that said, lenders are often more willing to give more favorable interest rates or lower down payments for those with higher credit.

There are also other options if your credit score doesn’t quite meet the needs of conventional refinancing or home buying. FHA loan programs allow people to access home mortgages with credit scores as low as 580.

Check Your Debt to Income Ratio

Your debt to income ratio (DTI) is your monthly debt payments divided by your annual income. Underwriters will examine how much debt you have and compare it to your income to ensure you have enough cash flow to make your monthly mortgage payments.

The magic number for DTI ratios is 43%, which means that 43% of your monthly income is eaten up by debt. That’s because, in most cases, this is the highest ratio you can have to be able to get a qualified mortgages.

These are usually preferred over non-qualified mortgages because they have more stable features, and you’re more likely to be able to pay them off.

Assets and Savings Verification

If you are self-employed or your income is a bit lower than anticipated, underwriters will also look at your assets and savings. If you have a large amount of money in your savings, they may be willing to approve you because you have the cash in your bank account to make monthly payments if necessary.

How Does Underwriting Affect Refinancing?

Underwriting is essentially the make-or-break moment to see if you can qualify for a mortgage or a refinance. Certain factors like your income, credit score, savings, and debt to income ratio can impact your eligibility and possibly prevent you from obtaining a refinance.

On the flip side, having strong credit, high income, and low debt can work in your favor. If an underwriter views you as a “trustworthy” candidate with a low chance of defaulting on the loan, the lender can give you less interest and more favorable terms since they don’t need to worry about making up for potential losses.

How to Strengthen Your Chances of Approval

If you feel like you might not be the best candidate for a loan or refinance, there are some tips and tricks to try to strengthen your chances of getting approved by the underwriter.

  • Raise Your Credit Score: A credit score is calculated from different pieces of credit data, including payment history and length of credit. To strengthen your score, make timely payments, open up new credit lines, and keep revolving credit balances low.
  • Increase Your Income: Your debt to income ratio is an important number that an underwriter will look at. Increasing your income by taking on a side gig or part-time job will never hurt your chances.
  • Lower Debt: You can also increase your DTI ratio by reducing your existing debt. Paying off credit card balances, car loans, and other types of debt can increase your chances of approval.
  • Make a Large Down Payment: If you can make a large down payment upfront, a lender will be more willing to approve your loan because you have a higher chance of paying it off in the long run. Typically, lenders like you can make a 20% down payment upfront

How Long Does Underwriting Take

The amount of time that it takes for you to get approval through the underwriting process varies on a case-by-case basis. However, it can take anywhere from one to three months in some circumstances. This can be frustrating if you’re looking to refinance and save money as quickly as possible.

A lot of this delay comes from communication barriers, but Network Capital does things differently. We do everything in-house from underwriting to closing, letting us get you to the closing table in as little as 15 business days.

We’ve simplified the refinancing process so you can spend less time worrying about approval and more time thinking about what you’ll do with the extra money you’re saving..

Ways to Expedite the Process

You can help to shorten the underwriting process in a few different ways. For one, it’s necessary to keep an open line of communication with your lender. They may reach out to you asking for additional documents, so the sooner you send that in, the sooner they can move forward. You can speed things up in the same realm by having all of your documents ready to go from the get-go. While it varies by lender, you’ll almost always need to provide tax returns, W-2s, pay stubs, and bank statements. If you’re able to send your underwriter all of this information right away, they can proceed much more quickly.

Also, major financial changes and spending can cause delays during the underwriting process. Try to keep your finances stable until you’re approved, as huge alterations may require the underwriting process to restart.

Finally, be honest about your finances and income. An underwriter will check records to see if you’re being truthful, so don’t try to hide information. Instead, it’s more beneficial to include notes or explanations for potentially problematic facets of your credit history or bank statements.

What to Do if an Underwriter Denies a Loan

Lenders are always looking forward to helping home buyers or refinancers gain the best rates on their home mortgage. However, not everything always goes according to plan. If a lender thinks you might not be fit for a refinance or mortgage at this time, there are a few concepts to consider.

For one, this can be a major point of improvement. Your lender will likely explain why you’ve been denied, but if not, ask them what their reasoning was. This can show you what you need to improve or work on in the future to increase your chances of qualification.

Sometimes, your application may get suspended if you haven’t provided the necessary documents. This doesn’t mean you can’t get approved – it just means you need to provide some information before the underwriter can move forward.

However, not everything is set in stone. You may be able to clear up some of these discrepancies or use some bargaining power to see if your potential lender is willing to make some exceptions.

Remember that every lender is different, and just because you got denied from one lender doesn’t mean you’ll get denied from others. Don’t get discouraged – there are plenty of options for any given situation.

In Conclusion

Underwriting is the process that determines whether or not you’ll get approved for your home mortgage or your refinance. It’s conducted by an underwriter, though you’re still very much involved from start to finish. So the more prepared you are the smoother the process will be, so don’t be scared, go find that forever home or refinance now it’s not scary with Network Capital.

This all might sound stressful, but Network Capital makes underwriting easy through our streamlined, in-house processing.

With competitive rates and $0 lender fees on certain programs, we’re committed to helping you live better. Learn more about our refinancing options.

All About Appraisers and Appraisals | ASA
What is a debt-to-income ratio? Why is the 43% debt-to-income ratio important? | Consumer Financial Protection Bureau
How to Improve Your Credit Score: Tips & Tricks | Debt.org