Underwriting Process

Once your loan officer is satisfied that there is enough documentation for an underwriter to grant approval, they will submit your loan. At this point, the underwriters will start examining your loan balanced with the results from the Automatic Underwriting Service (AUS) to determine your eligibility and what other documentation will be required to fully approve and fund the loan. AUS is a requirement for all qualified mortgages by Fannie Mae and Freddie Mac. Without getting into too much detail in this guide, all mortgages are subject to be sold on the secondary market. Eligibility to be sold on the secondary market is determined largely by AUS, which will outline documentation, how many months worth of reserves, and how much funds should be available to close the loan.

In addition to AUS, lenders have their own overlays to determine eligibility for certain mortgage loan products. The underwriter will take all of this into account and determine whether approval can be granted. A majority of times, when  a loan is submitted, it is missing documentation that must be received before a loan can be granted final approval. When this occurs, it is called a Conditional Approval and comes with a list of conditions to obtain final approval. Once all of the conditions are met, the loan will be granted final approval and called Clear To Close.

The underwriting process, from submission to clear to close, can vary significantly depending on what conditions need to be met. For example, if the loan requires an appraisal, and the appraisal takes 2 weeks to complete, final approval can not be granted until it is received. Conversely, if all of the documents were collected prior to submission, the underwriting process may only take a couple of days. This is especially true with a Interest Rate Reduction Refinance Loan (IRRRL) offered by the Veterans Administration, where little documentation is required.

What is the investor of my loan?

All mortgage loans are backed and provide some protection to the lender. The investor for your mortgage loan is largely determined by the type of loan. FHA loans are backed by the Federal Housing Administration. On VA loans, the loan is insured by the Department of Veterans Affairs. Conventional loans are generally insured by either Fannie Mae or Freddie Mac, which are government sponsored companies. All of these entities stimulate the housing market by creating standards and protections to the lender that allow mortgage loans to be sold easily on the secondary market which in turn frees up lender capital so that they can offer other mortgage loans to consumers.

How an Appraisal Can Influence A Refinance

If you remember when you first purchased your home, you needed an appraisal so that the lender could confirm the value of your property. During a refinance, the same occurs. The appraiser inspects your home, compares it to other homes that have sold recently in your area, and gives an opinion of what they believe the value should be.

There are some cases where an appraisal is not required. For example if the house has been appraised within the last 120 days, you may be eligible to have the appraisal waived.

What is the cost of an appraisal?

The cost of appraisal varies based on the company and availability of appraisers. There are also other factors, such as type and location of the property, whether it is a single-family home or multiunit, remote location, and some loan programs require specific appraisal inspections that may cost more. An average cost of an appraisal is between $450-600.

The Dreaded Low Appraisal

Since the lender is using the appraisal to confirm that they are not lending more than the value of the home, a low appraisal can bring with it a new set of problems during a refinance. If your appraisal comes back low, here are a few options:

  • Lower the refinance amount: If you are performing a rate and term refinance, to lower your interest rate, it might be necessary to bring some funds to the closing table to cover the difference between the loan amount and property value. If you are performing a cash-out refinance, you may have to adjust the loan amount.
  • Cancel the refinance: If there is not ample value in your home, a refinance may not be right for you at this time.

In a perfect world, the appraisal will come back at the value you estimated or a little higher. If you choose to cancel the refinance as a result of an appraisal that is under value for your loan, you could be subject to pay some fees in connection with your application. Prior research on the frontend to estimate the value is important to prevent a situation where you owe fees after cancelling the loan. Homewise Financial has tools available to aid you in determining an estimated value before incurring those fees.

After the appraisal is complete, and the underwriter approves all required conditions, your refinance is nearly complete. Your lender, or broker, will contact you to schedule closing and to discuss the final numbers found on your Closing Disclosure.