You’re approved, but it’s not a done deal
Achieving final approval from the underwriter is a big deal. Congratulations. But don’t celebrate yet. You’ll go through a few more steps before you get your keys.
- Your lender will conduct a final review, double checking to make sure your documents are correct. It will probably do a quality control check, pulling your credit report and verifying your employment one last time
- Ideally, you’ll get your closing documents a few days early to review before signing (request this)
- You’ll bring in your cash to close and sign your final documents
Some lenders will fund your loan almost immediately (table funding), while others may take a day or two to review the signed package first. Find out how your lender does things to avoid unwelcome surprises.Verify your new rate (Sep 24th, 2018)
The ability-to-repay rule
Lenders today must abide by what’s called the ability-to-repay rule, or ATR. That standard, according to the Consumer Financial Protection Bureau, requires lenders to consider eight underwriting factors:
- Current or reasonably expected income or assets
- Current employment status
- The monthly payment on the covered transaction
- Your monthly payment on any simultaneous loan
- The monthly payment for mortgage-related obligations
- Current debt obligations, alimony, and child support
- The monthly debt-to-income ratio or residual income
- Credit history
“Creditors,” says the government, “must generally use reasonably reliable third-party records to verify the information they use to evaluate the factors.”
Loans are underwritten to assure they meet government standards, as well as any requirements established by mortgage investors and mortgage insurers.
If a loan does not check all the boxes, the mortgage will be declined. If the loan is approved because of faulty underwriting, the lender can face huge fines and big legal penalties – even if the loan is performing. This explains why lenders are so picky about collecting paperwork.
Final approval from the underwriter
There must be someone to review and analyze all the paperwork lenders demand. That someone has traditionally been an underwriter. However, because we live in the age of artificial intelligence – AI – it’s very possible that your mortgage application will be underwritten by a computer program.
Even though the software approved your mortgage application, however, a human underwriter reviews your paperwork and underwriting conditions. So if the software approves your application assuming that you have $100,000 in the bank and earn a salary of $8,000 a month, your bank statement and pay stubs must back that up.
Once the underwriter has determined that your application meets the lender’s guidelines, he or she issues final approval. You’ll get a letter that indicates you can close your home loan and have no more outstanding conditions to meet.
Traditionally lenders ask for piles of paperwork. It’s been estimated that the typical loan application includes more than 500 pages of documentation. The good news is that lenders today require less and less paperwork from borrowers.
Instead of gathering an assortment of statements and information directly from borrowers, many lenders now ask for permission to gather such documents electronically. Say yes, and the lender may acquire much of your paperwork in seconds.
This information comes electronically from banks and other sources like payroll processors. There are no worries about missing blank pages or lost documents. If you work with a smaller local bank or work for a mom-and-pop shop that issues you hand-written checks, this option may not be available to you.
The quiet period: Don’t fall at the finish line
The only remaining task after approval is to attend closing and bring a cashier’s or certified check for your cash-to-close or arrange for a wire transfer.
In addition, you must avoid changing anything that could cause the lender to revoke your loan approval.
Lenders use artificial intelligence to constantly update the loan file. This can be a potent problem for the unwary. If you have a 43 percent debt-to-income ratio (DTI), buying a new car before closing you may increase your DTI and cause the lender to decline the loan application!
This really happens. Protect yourself. Once you apply for a mortgage, enter a “quiet” period. Do not spend money for anything but the basics until the lender’s check clears. Add nothing to your credit balances. Do not sign up for any new accounts.
Document review: LE vs CD
When you applied for a mortgage, the lender provided a Loan Estimate (LE) form which outlined your mortgage terms. Now, just before closing, you will receive a Closing Disclosure (CD) form. Check them both. Did you get your promised terms? If you have any questions, speak with the lender.
To close as a buyer, you will almost always have to bring funds to closing. It’s okay to use a cashier’s check, certified check or to wire the money. You cannot bring cash to most title offices. Be sure to check with the closing agent if you wire money. Confirm that the wiring instructions are correct, especially the recipient account number.
Dry versus wet settlements
There is one final task which results from mortgage underwriting. The lender must fund the transaction. You can have a “wet” settlement when the lender’s money is disbursed at closing. This is also called “table funding.”
In addition, there are also “dry” settlements, in which the money is paid a few days after closing. Ask the closing agent how lender funding will be handled. A payment delay may make sellers cranky – if not worse.Verify your new rate (Sep 24th, 2018)