What is Underwriting and How Does It Help You Get a Mortgage?
You’ve spent years saving up to buy your first home.
After spending years moving from one tiny New York apartment to another, it's time to take the next big step in your life as an adult.
After months of searching for a home in the city, you find your dream house in Morningside Heights, below Columbia and 106th street.
You take the next logical step and apply for a mortgage loan and learn, perhaps for the first time, how much cost and time it comes to purchasing a home.
When speaking to your mortgage broker or an account specialist, you may hear them mention the "underwriter" or "underwriting".
And you can’t buy that dream house without underwriting.
What is Underwriting?
Underwriting is the process by which a mortgage lender assesses their risk with each applicant.
- Underwriting is necessary to secure a mortgage.
- An underwriter is someone employed by a to vet each loan applicant's financial standing and ability to repay the loan.
- A mortgage underwriter will look at your income, credit, assets, and delinquencies, as well as the condition and value of the home in-contract to determine a loan commitment.
- The underwriter is responsible for accepting or rejecting your application.
- Underwriters are also utilized by insurance companies to assess the risk of each applicant.
- Home insurance and renters' insurance are necessities for living in New York City. Insurance companies will use the underwriter's assessment to accept your application and offer you a quote.
- An insurance underwriter will be looking at the type of home, condition of the home, and area you live to assess the risk of your property.
What Exactly is Underwriting?
Underwriting is essentially a complete vetting of your credentials and assessing the risk your lender is taking on with your loan.
It’s a critical component of buying a home. Your mortgage lender uses underwriting to verify if you can hold a mortgage on a home.
They do so by verifying your income and by looking at the documentation to support your earnings, assets, and liabilities.
They also look at how much debt you owe and whether or not you have a very good credit score.
Some documentation you need to show are W-2 forms, pay stubs, bank payments, and tax returns.
What Does an Underwriter Do?
An underwriter—or financial expert—will decide if loaning you money is a risk or not.
The underwriter assesses how much risk a lender can take on to be able to afford the monthly payments of a mortgage, both now and in the future.
However, it’s not just the underwriter who will consider your application
In underwriting, the bank, credit union, and mortgage lender have to be all on the same page to determine if you’ll be able to pay the loan so that they can make the decision on whether or not to approve your application.
What Does an Underwriter Look For?
Do your due diligence. Here’s what an underwriter looks for:
One of the most important things an underwriter assesses is how many years you’ve been covered by work.
It should be a steady stream of income.
If you’ve been at the same job for a few years, that’s ideal. This shows the underwriter that you’ll have the funds to carry a mortgage.
This simply means if you have access to cash in your bank account.
The underwriter needs to know that you will be financially eligible to close on your mortgage loan and pay for the down payment and all the necessary fees involved.
To about closing costs read: How to Calculate Closing Costs in NYC: A Guide For Buyers
Here, underwriters are looking to see if you have heavy credit card debt, alimony, or child support, to name a few.
The underwriter needs assurance that if you have these things, you’ll still be able to afford to make payments for the mortgage.
In underwriting, every financial transaction you make or have made is part of a component that decides if you are or not at risk.
If you owe taxes from the past and you haven’t made a payment, don’t think that just because it was a long time ago, the underwriter won’t consider that in your application. You can’t be that naïve. Everything counts. Call it the “Co-Op” syndrome.
But if you’ve been financially responsible and have always been making payments on time, this makes you appear trustworthy and the underwriter will most likely guarantee your loan.
The Necessary Appraisal
The underwriter will get an appraisal to determine the offer you’ve submitted to buy a home is at an appropriate value. This is called “collateral risk.”
The underwriter is actually protecting you in this step.
They won’t want to give you a loan if the house has some structural issues that could prove dangerous down the line, or if the house has had non-permitted improvements.
A property survey of the house will also be assessed.
The Underwriter Has the Final Say on Three Conditions
There are three resolutions issued after a thorough review of your loan.
The underwriter can approve you
However, this can happen only after a critical inquiry, such as where or how you received such a large deposit.
The underwriter can deny your application
Sometimes this can be due to just some kind of error, like if there’s a mistake in your application.
You should always check back with the lender.
Often, it’s serious, like the underwriter denying your loan because you have too much debt.
You can perhaps close your application and reapply only after you can lower your DTI ratio by trying to pay off your credit cards, for example.
Or maybe you can apply for a smaller loan.
You can be suspended.
This may look the scariest, but most time it’s just a document that the underwriter can’t assess because he or she doesn’t have it, like being able to verify your income or employment.
You should always check back with the lender to see what you can do.
What You Need to Do to Buy Your Dream Home
- Apply for the mortgage.
- The lender will give you the loan estimate to review.
- In this step, the lender will require documentation for the personal and financial details from your mortgage application.
- With documentation at hand, this is where the underwriter starts to verify your finances and looks for any personal risks.
- The waiting game: cross your heart and wait in anticipation over whether your mortgage has been approved, suspended, or denied.
- The lender will work with you to clear loan contingencies that were discovered when the underwriter verified your finances.
- This step is when your lender locks in your interest rate.
- This is when all the parts of the mortgage underwriting come into play and your lender grants you the mortgage.
- Your lender will give you a “clear to close,” which means your loan has been finalized and is ready when you close.
- You’ll be able to review all documentation and double-check to see how much you need for the closing.
- Once you close, you’ll be given the keys to the house and this is when the entire mortgage process is complete.
Underwriting is Not Just for Securing a Mortgage
Homeowners and renters who want insurance for their homes also need an underwriter.
In terms of insurance, underwriting looks very similar to mortgage underwriting.
It’s the underwriter who decides how much coverage you should receive while, at the same time, evaluates the risks to determine whether to insure you, the policyholder.
One risk is how likely a policyholder will make a claim.
For renters, rental insurance isn’t a requirement.
For homeowners, it turns out that homeowner's insurance isn’t a requirement as well, even in the eyes of the law.
The only insurance that is required by law, by the way, is car insurance.
For both homeowners and renters, many don’t bother to get insurance since it’s only a recommendation and not mandatory.
However, you will be required to have homeowners' insurance by your lender as well as your co-op or condo board.
Do you really need home insurance?
Don’t you want to protect your most valuable asset, i.e. your new home, as well as all the expensive things inside of it?
Since buying a home is one of the most expensive things you’ll ever purchase in life, it’s highly recommended that you get home insurance.
At the end of the day, you are on the hook for any loss and damage, not only to your possessions but of all the parts of your property.
So, it's important to know that you are covered.
Do you really need renter's insurance?
Tenants who own valuable things—such as artwork, rare books, antiques, etc—should definitely look at getting renter’s insurance.
If there’s fire, theft, or damage and you haven’t covered your valuables, you will not be able to claim anything for reimbursement.
Your landlord is not responsible to replace or pay for any damage to or loss of valuables, even if the damage comes from leaks in the building or lack of security.
If the value of what you own is low or moderate, your renter’s insurance may only be around $10-$15 a month and if the value is high, then the insurance will be higher, around the $100 range.
It’s not a lot, and you get security.
Some landlords in New York City also require that you show them proof of renters insurance in order to move into their building.
Getting homeowners' insurance can be challenging
The underwriting for affordable home insurance is as tough as getting the mortgage underwriting approved.
There are many factors that underwriters take into account when analyzing a policyholder.
If your home is old and needs updating, such as outdated wiring and plumbing or a roof that needs severe fixing, or if there are no home security measures in place, then the underwriter will likely deny you.
But it’s not a disaster.
If you just fix these things, an underwriter will reconsider your application and if you’ve purchased a home security system, you may just find yourself with a lower monthly premium.
However, most mortgage lenders require some basic form of homeowners' insurance and will not close on your loan unless they have proof of coverage and your payment for coverage.
Your lender isn’t trying to get you to spend more money.
In fact, the lender is looking out for you, and it’s in their best interest that your house is protected.
Home Insurance Protects Your Home
It may be hard to invest in home insurance right away after you’ve just literally purchased your property.
But you have to find the money somewhere in case something happens.
After all, you’ve spent years saving up, and then you went through the trouble to finance your new home.
So, it’s in your best interest.
There’s always a chance a visitor could get hurt on your property.
Let’s look at an example.
If you’re mopping your floor and the floor is wet. Your neighbor happens to come by and slips injuring herself.
That means you could be liable for her injuries, which leads to medical fees for said bodily injury.
That could mean your neighbor suing you for damages. Depending on what she says, those claims (level of injury as well as any damage to her personal items) can get expensive.
Home Insurance Protects Your Belongings
An added plus in getting homeowners insurance is that it not just covers your actual house, but also what’s inside it.
You know, things of value, like jewelry and other expensive equipment, such as electronics like your plasma TVs, your laptop, and even if you have one too, a basket that costs $1,000.
If there’s theft, damage, or loss of these things, it’s good to know that your insurance will replace your items.
Other Types of Underwriting
There are plenty of other applications for underwriting.
Besides underwriting for renters' and homeowners' insurance, underwriting exists in other areas of the insurance industry, which include auto, life, health, dental, pet, liability, etc.
Underwriting also exists for other types of loans. These include but are not limited to personal loans, auto loans, student loans, and business loans.
Lastly, an area you might not think underwriters are utilized is securities.
Securities underwriting involves assessing the risk and value of large financial investments, namely initial public offerings (IPO's), by investment firms.
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