Congratulations! Your loan is at the final approval stage, and it’s almost time to celebrate. All that’s left is for the loan to go through a final compliance and quality control check and then you close! You and your lender worked hard to get here. You’ve also undoubtedly asked “why on earth are they asking for so many things?” or something similar … maybe with or without some added four-letter words. Let’s do a quick review of what it took to get to the finish line.
Unofficially, underwriting starts when you requested to be pre-approved for a loan (remember, a pre-approval is different from a pre-qualification). With today’s compliance and regulation requirements, lenders must abide by and document what’s called a borrower’s Ability-To-Repay (ATR) rule. This is the standard brought forth by the Consumer Financial Protection Bureau (CFPB) following the housing crisis. The ATR requires lenders to consider the following:
- Current or reasonably expected income
- Current employment status
- Monthly payment on the covered transaction
- Monthly payment on any simultaneous loan
- Monthly payment for mortgage-related obligations
- Current debt obligations, alimony and child support
- Monthly debt-to-income ratio or residual income
- Credit history
Lenders are required to follow the government standards of underwriting plus any additional requirements based upon specific program or bank overlays (added protection).
Most of this underwriting is initially done by artificial intelligence. The approval decision is based upon data entered by both you and your loan officer. Intelligence-based approval systems, also known as automated underwriting, continue to make improvements to help cut down on inefficiencies, but all loans still depend on a human underwriter to verify all the data used. Will paperwork please enter the room?
Yes, it will.
On average, a loan application will have hundreds of pieces of paper. These documents include the loan application, documented income, documented assets, documented credit and any other document requested by the actual underwriter. A good loan officer will act as an underwriter and anticipate most (or all) that’s needed to be documented based on your initial pre-approval. While this doesn’t necessarily reduce the number of pages of documents needed, it condenses the number of document requests to make it more efficient. The more an underwriter must prove by the time the loan gets to him/her, the more documents needed from you later in the process.
Once the underwriter has verified all that needs to be documented, you get to hear those sweet words “clear to close.” This is the final approval and nearly time to slap high fives. I said nearly. Your loan still needs final compliance to check things like continued employment and any added debt. This is important to know so that you don’t do something silly like change jobs or buy a car right before you close on your home loan.
Once final compliance is done … it’s time to slap high fives. You did a great job! Hopefully your lender did a great job too, but that’s for you to decide. The process isn’t what anyone would describe as enjoyable, but it can be pleasant and surprisingly efficient if you work with the right lender.