5 key steps in the mortgage underwriting process

You’re ready to take the plunge and buy a home. If you’re like most people, you plan to take out a mortgage to finance the purchase. How exactly does it work?

The mortgage underwriting process can be broken down into a few key steps.

Get prequalified

Your very first step before you even begin your house hunt should be to get prequalified for a loan. A potential lender will review your basic financial information, like your income and your debts, and also run a credit check. This will determine what kind of mortgage is the right fit for your budget.

Truth in lending

Be prepared to have your income confirmed and provide other financial documentation like tax returns and bank account statements. A loan processor will then verify all of your information. After validating everything, the lender will then issue a preapproval letter, stating that they are willing to lend you a certain amount based on the information you provided them.

Although the process is more in-depth, it shows the seller that you’re a serious buyer and that, if you make an offer, you can back it up with bank financing. Use Bankrate’s mortgage calculator to figure out how much you need.

Appraisal

Once you’ve found a house that fits both your wants and your budget and you’ve made an offer to purchase, a lender will then conduct an appraisal of the property. The purpose is to assess whether the amount you offered to pay is an appropriate price based on the house’s condition and comparable homes in the neighborhood. The cost of the appraisal will vary from a few hundred dollars to over a thousand, depending on the complexity and size of the home.

Title search and title insurance

Your lender doesn’t want to lend money against a house that may have legal claims on it. That’s why a title company performs a title search to make sure the property can legally be transferred.

The title company will research the history of the property, looking for issues including mortgages, claims, liens, easement rights, zoning ordinances, pending legal action, unpaid taxes, and restrictive covenants.

The title insurer then issues an insurance policy that guarantees the accuracy of their work. In some cases, two policies are issued — one to protect the lender and one to protect the property owner.

Closing time

The final step is closing day. The closing is when the bank funds your loan and pays the selling party in exchange for the title to the property.  This is when you’ll sign the final paperwork and settle up any closing costs that may be due. Closing costs typically average around $1,800 nationwide, according to the latest Bankrate survey.

This is the end of the process and your purchase is complete!

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