A Look at the Mortgage Underwriting Process in California

Home buyers tend to have a lot of questions about the mortgage underwriting process in California. That’s partly because this process happens without their direct involvement, for the most part.

What is underwriting? What does the underwriter do? How long does the process take, on average? This guide will answer these and other common questions from California home buyers.

Mortgage Underwriting in Plain English

Let’s start with a basic definition, before we get into the nuts and bolts of the process.

You can think of underwriting as an in-depth examination of the borrower, the loan details, the paperwork, and the property itself.

It’s the underwriter’s job to determine if the risk of lending to a particular borrower is acceptable. They do this by examining the borrower’s credit score, debt ratios, employment and income documents, the home appraisal report, and other documents.

Lender Guidelines and Program Requirements

During this process, the underwriter will ensure that the borrower meets the requirements set forth by the lender, as well as the requirements of secondary organizations.

In addition to using their own internal guidelines, lenders have to follow the underwriting guidelines established by groups like Freddie Mac and Fannie Mae. These organizations have specific parameters for the loans they can purchase.

Secondary guidelines can also come from the Federal Housing Administration or the Department of Veterans Affairs (for FHA and VA home loans, respectively). In California, FHA and VA loans have to meet certain underwriting guidelines.

Understanding Mortgage Underwriting Outcomes

During underwriting, the lender’s underwriter will review your financial documents, credit history, employment details, and property information to decide if you qualify for a mortgage.

Generally speaking, this process can result in three different outcomes:

1. Approval With No Issues

In this (ideal) scenario, your file meets all the lender’s requirements, and you move forward smoothly. This means your income, credit score, and documentation are in order, so you can expect a straightforward approval and closing process.

2. Conditional Approval

This is the mortgage underwriting equivalent of a pause button. In this scenario, the underwriter is generally positive about your application but needs additional information or clarification before giving final approval.

For example, the underwriter might need additional documents such as bank statements, or clarification on an employment history or credit issue. Resolving conditions quickly can help prevent unwanted delays.

3. Loan Denial (Rare)

In some cases, the underwriter may determine that you do not meet the necessary criteria for the loan. Denials are less common than the other two scenarios above, but it can happen. A borrower might be turned down due to a low credit score, insufficient income, or problems with the home appraisal.

How Long Does the Process Take in California?

The length of this process can vary from one transaction to the next, because every borrower has a unique financial situation. No two loans are exactly alike.

In California, mortgage underwriting can take anywhere from a couple of days to over a week. (Or longer, in rare cases.) When you consider all of the different conditions that can arise at this stage, you can understand why it varies so much.

The type of home loan being used, the borrower’s credit history, and other factors can affect the length and complexity of the mortgage underwriting process in California.

Tips to Keep the Process Moving Forward

As a home buyer, you are not directly involved with the mortgage underwriting process. Even so, there are certain proactive steps you can take to help keep the process on track.

Here are some of those best practices:

• Stay Organized: Keep all financial records (like tax returns, pay stubs, and bank statements) neatly filed and ready to submit if requested.
• Respond Quickly: If an underwriter requests additional information, provide it as soon as possible. Prompt responses can help prevent unnecessary delays in closing.
• Ask Questions: Reach out to your lender or mortgage broker if you’re unsure why a document is needed or what a particular condition means.
• Plan Ahead: Evaluate your financial situation and address potential issues as soon as possible. For example, some borrowers need to improve their credit before applying for a loan.

The Home Stretch: What Happens After Underwriting?

If the underwriter determines that the loan is an acceptable risk based on the lender’s guidelines (and it conforms to other external requirements, such as FHA, VA, or Freddie Mac), he or she will give it a green light.

In industry jargon, this is sometimes referred to as being “clear to close.” You have cleared the mortgage underwriting process, and you are now on track to close the deal and receive funding.

At this stage, the escrow company will begin to prepare all of the closing documents. These are the finalized documents the home buyer / borrower must sign before the deal can be closed.

These days, many (if not all) of the closing documents can be signed digitally to reduce the need for face-to-face meetings. Once the documents are signed, you have officially closed on your home.

A Mini-Glossary for California Home Buyers

The mortgage industry has its own “language” with a lot of terms and acronyms you might not be familiar with. Here are some important terms that relate to underwriting in particular:

• Appraisal: An evaluation of a property’s market value by a licensed professional, used by lenders to ensure the home is worth the loan amount.
• Automated Underwriting System (AUS): A software tool used by lenders to quickly assess a borrower’s credit, income, and assets to determine initial loan eligibility.
• Clear to Close (CTC): A final approval from the underwriter indicating that all conditions have been met and the loan is ready for closing.
• Conditional Approval: A loan approval that requires additional documentation or clarification before final approval can be granted.
• Debt-to-Income Ratio (DTI): A key underwriting metric that compares a borrower’s monthly debt payments to their gross income to determine affordability.
• Employment Verification (VOE): A process where the lender confirms the borrower’s job status and income, often through employer documentation or tax returns.
• Manual Underwriting: A more detailed, case-by-case loan review process used when an automated system cannot approve a borrower due to unique financial circumstances.
• Pre-Approval: A lender’s initial evaluation of a borrower’s financial situation, giving a conditional commitment for a loan amount before underwriting.
• Reserves: Extra savings or liquid assets a borrower has after closing, often required to cover future mortgage payments in case of financial hardship.
• Risk Assessment: The process of evaluating a borrower’s financial stability, credit history, and ability to repay the loan.
• Underwriter: A mortgage professional who reviews a borrower’s financial details and property information to determine if a loan meets lending guidelines.
• Verification of Assets (VOA): A process where the lender confirms the borrower’s savings, investments, or other funds needed for the down payment and closing costs.