Lenders go over your financial information with a fine-toothed comb to determine the likelihood that you will repay a mortgage. They also thoroughly review information about the property that will act as collateral for the loan. Borrower and property underwriting are the most critical parts of the mortgage acquisition process, since a qualified borrower can only finance a home that meets lender standards. The lender's home appraisal must pass the underwriting review to close the loan.
The lender's underwriter processes the borrower's paperwork, reviews the mortgage application and supporting documents for accuracy, analyses his financial situation, including credit, and verifies income, assets and employment information. The underwriter, well-versed in his lender's qualifying criteria, determines whether the borrower's debt load and income are sufficient to repay the proposed loan amount. The underwriter also reviews the purchase agreement, the home's title documents and escrow paperwork to ensure the home meets lender requirements.
A home appraisal report serves two main purposes: determine an estimated fair market value for the home and describe the property's favorable and unfavorable features to the lender. Its basic contents include: interior and exterior photos of the property and its main components; a picture of the street, a map of its location and a list of comparable homes. Comparables are the most recent sales or listings, within the past 90 days, of similar age, style and location. A shortage of comparable homes requires the appraiser to expand his search or explain the lack of detailed market data. The report also includes commentary about market trends and the property's condition. An appraiser acts as the eyes and ears for the lender and provides an unbiased opinion of the property. All mortgage loans, with the exception of certain streamline refinances and home equity loans, require an acceptable appraisal report to close.
Closing takes place after the underwriter signs off on the borrower's paperwork and the appraisal. These items can take up to several weeks to thoroughly review and the time period between receipt of borrower paperwork and the appraisal to closing varies by lender and borrower. Closing and final loan document signing in front of a Notary Public are often considered the same event; however, a purchase or refinance transaction is fully closed when the loan is funded and property title transfers to the borrower.
Appraisal problems can delay or prevent closing. Errors on the appraisal report identified in underwriting can take several days to fix because the appraiser is an outside third party, often contracted through an appraisal management company. Low appraisals, a common problem in upward markets, can delay closing if the borrower contests the value or the parties have to renegotiate the contract. Typical remedies to a low appraisal involve lowering the sale price to align with the appraised value, increase the borrower's down payment to cover the shortfall between appraised value and sale price, or a combination of both.
- LoanSafe.org: What is A Mortgage Underwriter?
- Homebuying Institute: How Long Does it Take to Get an FHA Loan?
- American Enterprise Institute: Reality, Unreality: Are Low Appraisal Values A Problem in Housing?
- HUD: Underwriting the Appraisal Facts
- Rocket Mortgage. “Refinance Appraisal vs. Purchase Appraisal.” Accessed June 8, 2020.
- Rocket Mortgage. “Home Appraisal: What Is It, And What Does It Cost?” Accessed June 8, 2020.
- Appraisal Institute. "Frequently Asked Questions," Page 1. Accessed June 8, 2020.
- Fannie Mae. "Uniform Residential Appraisal Report (Form 1004)." Page 4. Accessed June 8, 2020.
- HUD.gov. “Streamline Your FHA Mortgage.” Accessed June 8, 2020.
Karina C. Hernandez is a real estate agent in San Diego. She has covered housing and personal finance topics for multiple internet channels over the past 10 years. Karina has a B.A. in English from UCLA and has written for eHow, sfGate, the nest, Quicken, TurboTax, RE/Max, Zacks and Opposing Views.