After finding your perfect home and being approved for a mortgage loan, you look through the different closing costs. While many costs are self-explanatory, such as closing date changes, you might come across a few unfamiliar ones, including an underwriting fee. Sure, it’s an added cost, but what exactly is an underwriting fee?
At its basic definition, underwriting fees are fees collected by underwriters for performing their services. They are not limited to just mortgages; they are used during various financial transactions with some risk associated with them. Insurance companies and financial investment firms rely heavily on underwriters.
Underwriting fees will vary based on the individual underwriter, the situation, and the job itself.
What is Underwriting?
It’s important to know what underwriting entails as a whole to understand an underwriting fee.
Underwriting is the process of taking on a risk in a financial transaction, such as a mortgage or a new investment. Underwriters assess the transaction’s risk, allowing them to determine how much of a risk they can assume and the price of said risk.
For example, mortgage underwriters will evaluate personal finances, income, debt, and ability to pay back the loan to determine the risk factor in lending a mortgage loan. On the other hand, life insurance underwriters will look at age, hobbies, current health, medical history, and more before offering a quote.
Any type of financial institution needs to use underwriters in order to mitigate the risk of any new transactions. Otherwise, the institution would only rely on educated guesses to evaluate the risk of a new venture, which may end up poorly, resulting in a loss of revenue for them. They also help protect consumers by ensuring they aren’t overpaying for services or items.
What are Underwriting Fees?
Underwriters need to be paid for their services, which is where underwriting fees come into play. Underwriting fees are simply fees that underwriters collect for performing their services. These fees will vary by the type of institution they are working for and each individual system.
Insurance underwriting fees, for example, are collected to calculate a policyholder’s risk of loss and will determine the policy premium based on the level of risk. Underwriters who focus on financial investments will work with investors to determine the price of an offering.
The insurance underwriting fees will usually be a set amount, while the underwriters who work with investors will receive their fees as a small percentage of the proceeds from the shares.
Mortgage Underwriting Fees
Mortgage underwriters are used to evaluate mortgage loan applications for risk of default and can deny or accept each application based on their findings. They are usually found included in the lender fees, along with an origination fee, credit report fee, and others.
Underwriters who specialize in mortgages will assess the overall risk of a mortgage applicant by looking at their credit score, credit report, the intended property, and debt-to-income ratio. They will look at all the information submitted with a mortgage application to make their decision, approving or denying based on their findings.
Many mortgage underwriters have guides that they follow, such as Fannie Mae’s underwriting guidelines, but they will also consider multiple factors in their decision-making process. If you have poor credit, for example, the underwriter won’t immediately reject your application. They will consider other parts of your financial background, like the type of property and any assets you might have.
Although many may view underwriters negatively since they can deny an application, they are there to ensure buyers don’t purchase a house they can’t afford, preventing them from financial hardship in the future. Underwriters work to make sure any financial risk is worth taking for both parties, rather than just the lender or the buyer.
What is the average mortgage underwriting fee?
Mortgage underwriting fees are often factored into the closing costs of a home. They may be written into another category of the closing costs, such as the lender fees, so you may have to ask specifically for an itemized list from your lender to find the exact amount of underwriting fees you are paying.
Depending on the loan amount and your lender, total closing costs for an average home can range anywhere from 2-5% of the loan amount. By themselves, underwriting fees are often a set amount by the loan company and range from $300 to $900. However, they may be higher or lower depending on the financial intuition.
The underwriting fee may also be called a processing fee or origination fee. If your lender combines the underwriting fee with other fees, it may be a higher total fee.
How long does mortgage underwriting take?
Mortgage underwriting, and subsequent mortgage approval, can take anywhere from a few days to as much as a week. Underwriters must process several documents and look at many factors when approving or denying an application, including a person’s credit, collateral, and ability to pay off the loan.
While it may be a stressful waiting period for the applicant, patience is key. Once the underwriter has researched the applicant, they will make an informed decision. The underwriters can either deny, approve, or pend a mortgage application.
- Deny – If an underwriter has denied an application, it is important to understand why. It may be because of low credit or too much debt. Once you know why the application was denied, you can take steps to fix the problem.
- Approve – Approving your application means you and the mortgage lender may schedule your closing date. Make sure to look over any conditions that may have come with it in case you need to provide more information.
- Pending – Sometimes, your application may reach a pending status. Pending typically means you need to submit additional documents or information in order for the underwriter to reach a final decision.
What is an underwriting fee for refinancing?
Many people may want to refinance their loans to lower their interest rates or consolidate their debt but are surprised to learn that more fees are associated with it, including underwriting fees.
Just as with your original mortgage, an underwriter must take the time to make sure you are able to afford the new mortgage payment and will need to research your financial background. Some lenders may lower underwriting fees for refinancing or waive them altogether, depending on the situation.
Similar to the original mortgage loan, the average closing costs for a refinance loan, with underwriting fees included, is between 2% and 5% of the loan amount.
Lender Fees vs. Underwriting Fees
Underwriting fees are often bundled with other types of fees when listed in the closing costs. The most common term for them is lender fees. Lender fees include underwriting, application, processing, and origination fees. What is encompassed under lender fees, though, will vary depending on the lender you are working with. If you have any questions or concerns about what you are paying for, speak with your lender, and they will be able to provide a breakdown of the fees for you and explain each one.
No lender fee mortgages – Are they worth it?
Some lenders may advertise no origination fee mortgages or no lender fee mortgages, meaning there won’t be any extra fees for processing your application. While these seem like a good deal, lenders will often put these fees in the price of the mortgage, which could end up costing you more money over time than paying them upfront. Instead, it’s best to get an upfront cost of the lender fees to know what you are paying for.
Understanding Underwriting Fees
Underwriting fees may sound intimidating, but they are only the fees underwriters charge to ensure the loan is worth the risk for the lender and the buyer. Purchasing a house introduces many new terms you may not have heard of before, including underwriting fees. However, by researching and understanding the terms, you can be more prepared for your closing costs and even have the opportunity to research the best lender for your mortgage.
We at SouthEast bank can help you navigate the complex terminology that comes with buying a new home to ensure you understand every aspect of your new mortgage. If you have any questions or are interested in a new home loan, feel free to contact us, and we will be happy to answer any of your questions.
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