As a follow-up to our article about the steps in the underwriting process we posted earlier this week, we decided to write about some mistakes to avoid during the underwriting process so you don’t mess up the financing just weeks before closing on the house. You’ve come so close to buying a new home, so avoid these roadblocks.
Click here to read our previous article: What is underwriting? How does it work?
Here are 5 things buyers shouldn’t do while the underwriters do their job
Not responding to emails from the lender
As we explained in the previous article, your loan underwriter may require extra documentation to clarify your financial standing. The underwriting process is time-sensitive, and time is money (hundreds of thousands of dollars worth). You should check your email multiple times per day, or have email notifications set up on your phone or computer so you can see when an email from your lender comes in. If you wait too long to respond, it could throw off the closing timeline.
Buying an improperly valued home
When an appraisal comes in low, it is a rare exception. If, in the rare instance, the appraisal for the home you are purchasing comes in low, that means that you and your agent submitted an offer that more than the property is worth. Talk to your agent and the seller’s agent about covering the appraisal cost difference. This will also involve potentially retooling your offer and extending the closing and underwriting timeline. Again, this is a rare occurrence.
Exceeding loan limitations
Different loan types have different limitations that the property must adhere to. Some, like government-backed FHA and VA loans, have certain minimum guidelines that must be met in order for the sale to move forward—which include, but are not limited to, sufficient heating, proper roofing, working electrical systems, functioning appliances, and at least one functional bathroom. Sometimes, buyers looking for a fixer-upper or demolition property can run into falling short of these minimum guidelines. This can disqualify the buyers from getting the loan. To avoid this roadblock, ask your lender for clarification about loan limitations early in the buying process.
Lying to your lender
Underwriting is the process of fact-checking everything you have given to your lender for your loan application. The most important part is about your finances since they are working on cutting you a check for hundreds of thousands of dollars and the bank wants to protect that investment. If you rounded up or fudged a few numbers based on what you hope you will have by closing time, a discrepancy will pop up and the lender will ask for clarification. If you can't come up with proof of funds your application may get delayed or denied. Be upfront and honest about your savings amount and financial standing.
Frivolous purchases while your home is pending
You may be so excited to get a bigger house and are planning to fill it with new furniture, buy that new RV for your RV bay, or get that pinball machine you’ve always wanted. Do not make these purchases until after you are handed the keys to your new home and the sale is fully completed. If you have a drastic change in your financial situation due to frivolous spending, the lender may halt the underwriting process to account for the change in your income or savings. This could lead to getting a smaller loan or denial of your application. However, if that massive spending or loss of income was due to a medical emergency or sudden job loss completely out of your control, speak to your lender about what your options are moving forward.
FAQs
Tip #1: Don't Apply For Any New Credit Lines During Underwriting. Any major financial changes and spending can cause problems during the underwriting process. New lines of credit or loans can interrupt this process. Also, avoid making any purchases that may decrease your assets.
What not to do during underwriting? ›
Tip #1: Don't Apply For Any New Credit Lines During Underwriting. Any major financial changes and spending can cause problems during the underwriting process. New lines of credit or loans can interrupt this process. Also, avoid making any purchases that may decrease your assets.
How likely is it to get denied during underwriting? ›
You may be wondering how often underwriters denies loans? According to the mortgage data firm HSH.com, about 8% of mortgage applications are denied, though denial rates vary by location and loan type. For example, FHA loans have different requirements that may make getting the loan easier than other loan types.
Which of the following is not a step in the underwriting process? ›
the Federal Reserve. The Federal Reserve is not part of the process and does not regulate the underwriting process.
What do underwriters look at? ›
When trying to determine whether you have the means to pay off the loan, the underwriter will review your employment, income, debt and assets. They'll look at your savings, checking, 401k and IRA accounts, tax returns and other records of income, as well as your debt-to-income ratio.
Do underwriters look at your spending? ›
When you begin the mortgage process, underwriters want to be sure you have the funds to cover the substantial costs that come with taking on a mortgage. Bank statements prove that you have money for a down payment, provide insight into your spending patterns and demonstrate that your income matches your claims.
What is riskiest to the underwriter? ›
In the securities industry, underwriting risk usually arises if an underwriter overestimates demand for an underwritten issue or if market conditions change suddenly. In such cases, the underwriter may be required to hold part of the issue in its inventory or sell at a loss.
Should I be nervous about underwriting? ›
There's no reason for a borrower to worry or stress during the underwriting process if they get prequalified.
What can an underwriter not ask for? ›
Underwriters Cannot Directly Ask You Anything
All questions and discussions should be handled through your lender or loan officer. An underwriter talking to you directly, or even knowing you personally, is a conflict of interest.
How hard is it to pass underwriting? ›
A mortgage underwriter typically denies about 1 in 10 mortgage loan applications. A mortgage loan application can be denied for many reasons, including a borrower's low credit score, recent employment change or high debt-to-income ratio.
Standards may differ from lender to lender, but there are four core components — the four C's — that lenders will evaluate in determining whether they will make a loan: capacity, capital, collateral and credit.
What are the three C's of underwriting? ›
They evaluate credit and payment history, income and assets available for a down payment and categorize their findings as the Three C's: Capacity, Credit and Collateral.
What is the most important factor in underwriting? ›
The most critical factor in underwriting your policy is your current health. If you have a severe health condition, the likelihood of premature death increases. The amount of coverage you can afford may be less in that case.
Do underwriters watch your bank account? ›
Your recent bank statements show if you can afford the down payment and closing costs, as well as monthly mortgage payments. As they are essential to this, your lenders check bank statements, deposits, and withdrawals for red flags — particularly negative balances resulting from overdrafts or non-sufficient funds fees.
What do the underwriters check for final approval? ›
In deciding whether to approve your mortgage, underwriters consider your credit history and score, your financial profile and a home appraisal. There are many steps involved in the underwriting process, which can take a few days or weeks to complete.
How do underwriters verify income? ›
Mortgage lenders usually verify income and employment by contacting a borrower's employer directly and reviewing recent employment and income documentation. These documents can include an employment verification letter, recent pay stubs, W-2s, or anything else to prove an employment history and confirm income.
Can I spend money during underwriting? ›
A mortgage is a major financial commitment. So, the underwriting process will include a thorough examination of your financial situation to make sure you can afford the loan. If you make a big purchase during the process, that could derail your mortgage application.
Can a loan fall through during underwriting? ›
There are many reasons why an underwriter may deny your mortgage loan, such as a low income, an unsatisfactory credit history or a recent change in employment.
Can I use my credit card while underwriting? ›
While you're waiting to close on a home, you can still use your credit card, but it's best to only use it for small purchases and pay off the balance in full. Do not make large purchases you cannot afford to pay off that'll leave you carrying a significant balance from month to month.
