An underwriter is an entity, typically a company, accountable for analyzing and assuming the risk of another entity. Underwriting typically happens behind the scenes but is an important aspect of mortgage approvals.
The mortgage underwriting process has five key steps: verification, appraisal, title search and insurance, flood certification, and surveying.
After the housing crisis of the mid-2000s, the Consumer Financial Protection Bureau enacted rules to protect borrowers. Under these new rules, lenders must be sure a borrower is qualified. Verifying the information you put on your application is top priority.
The lender's team of underwriters will check the information on your application and supporting documents.
They will call your employer, for example, to confirm that you work at that job and that you are paid what you said you're paid. If you're self-employed, you may need to supply a lot more documentation.
The amount of verification involved depends on how risky your lender perceives you to be.
The lender wants to be sure that the price of the property you're buying is comparable to the values of similar properties. The lender will get an independent appraisal of the property prior to closing, and the results could affect the rate and terms of your mortgage.
A licensed appraiser will provide an expert's estimated value based on a physical inspection and comparables, or "comps" -- prices paid for comparable properties that have recently sold in the neighborhood.
An appraisal typically costs between $300 and $500.
Title Search and Title Insurance
After the appraiser has looked at the physical side of your house, a title company looks at its legal history. Your lender doesn't want to lend money against a house that may have claims on it. That's why a title company performs a title search.
The title company will research the history of the property, looking for encumbrances such as mortgages, claims, liens, easement rights, zoning ordinances, pending legal action, unpaid taxes and restrictive covenants.
The title insurer then issues a policy that guarantees the accuracy of the work. Your lender will require a title policy that protects the lender. In some cases two policies are issued -- one to protect the lender and one to protect the property owner.
Flood insurance is not part of a standard homeowners insurance policy. If your property is in a flood zone, your lender wants to know about it.
The lender will hire a specialist to analyze your property and neighboring sites to determine if the home is in a flood zone; the report is called a flood certification. If you're in a flood zone, you'll be required to buy flood insurance.
If you think you may be in a flood-prone area, you can check out any property on FloodSmart.gov before you even start searching for your new home.
Finally, some lenders will require that a home's property boundaries be verified by a professional survey.
While all of this information is being gathered, you can help by taking these steps:
- Provide complete documentation with your application.
- Respond promptly to your lender's request for more information.
- Call your lender and real estate agent to check on your loan application status.
- Help contact employers and others who may need to provide documentation.
- Keep records of your conversations with your lender.