Woman referencing documents while using her laptop on the floor
Hero Images/Getty Images

If you’re like most people who buy a home, you take out a mortgage to finance the purchase. The process that lenders use to assess your creditworthiness is called underwriting.

What is mortgage underwriting?

Underwriting is the mortgage lender’s process of assessing the risk of lending money to you. The bank, credit union or mortgage lender has to determine whether you are able to pay back the home loan before deciding whether to approve your application.

A loan officer or mortgage broker collects the many documents necessary for your application.  The underwriter verifies your identification, checks your credit history, and assesses your financial situation — including your income, cash reserves, equity investment, financial assets and other risk factors.

Many banks closely follow underwriting guidelines from Fannie Mae and Freddie Mac, the giant government-sponsored enterprises that keep the U.S. mortgage market running smoothly. The underwriter might assess your mortgage application manually or run it through a software program to make the determination.

What does my mortgage underwriter look for?

The underwriter’s job is to assess delinquency risk, meaning the overall risk that you would not repay the mortgage. To do so, they evaluate factors that help them understand your financial situation, including:

  • Your credit score
    • They check whether you meet the lender’s minimum requirements
  • Your credit report
    • This shows history with loans and repayment
  • Appraise the property you intend to buy
    • They determine whether it provides adequate collateral for the lender
  • Then they document their assessments

Underwriters weigh various elements of your loan application as a whole when deciding whether they think the risk level is acceptable.

Here’s an example from Fannie Mae’s underwriting guidelines. Say a given lender typically requires the following to approve a mortgage:

  • Maximum loan-to-value (LTV) ratio of 95 percent
  • Credit score of 680 or higher
  • Maximum debt-to-income (DTI) ratio of 36 percent

But if an applicant falls short in one area, the loan might still be approved based on the strength of certain factors, including:

  • LTV ratio
  • Credit score
  • Whether you will occupy the property
  • Amortization schedule
  • Type of property and how many units it has
  • DTI ratio
  • Financial reserves

So, if you had a worse DTI — say 40 percent — you might get approved for a mortgage as long as you had a better credit score. Or, if your LTV ratio was better than 75 percent, you might be able to get mortgage approval even with a lower credit score, as low as 620.

Getting a mortgage approved: What to expect

When you submit your mortgage application to the loan officer, you’ll need to include extensive financial documentation, such as W-2 forms, pay stubs, bank payments and tax returns. When processing the application, the lender may come back to you with questions or requests for additional information. Responding to such requests quickly will help speed your mortgage application.

Here’s an overview of the steps to getting your mortgage:

1. Get prequalified

Your very first step — even before you start looking for a house — should be to get prequalified for a loan. A lender will review your basic financial information, such as your income and your debts, and run a credit check.

Getting prequalified will help you determine what kind of mortgage fits your budget.

Check your credit score for free with Bankrate before you get prequalified.

2. Income verification and documents

Be prepared to have your income verified and provide other financial documentation such as tax returns and bank account statements. A loan processor will confirm your information. The lender then will issue a preapproval letter, stating that it is willing to lend you a certain amount based on the information you provided.

A preapproval letter shows the seller that you’re a serious buyer and can back a purchase offer with bank financing.

Use Bankrate’s mortgage calculator to figure out how much you need.

3. Appraisal

Once you’ve found a house you like that fits your budget and have made an offer on it, a lender will conduct an appraisal of the property. This is to assess whether the amount you offered to pay is appropriate, based on the house’s condition and comparable homes in the neighborhood.

The cost of the appraisal will vary from a few hundred dollars to over a thousand, depending on the complexity and size of the home.

4. Title search and title insurance

A lender doesn’t want to lend money for a house that has legal claims on it. That’s why a title company performs a title search to make sure the property can be transferred.

The title company will research the history of the property, looking for mortgages, claims, liens, easement rights, zoning ordinances, pending legal action, unpaid taxes and restrictive covenants.

The title insurer then issues an insurance policy that guarantees the accuracy of its research. In some cases, two policies are issued: one to protect the lender and one to protect the property owner.

5. The underwriting decision: approved, denied, suspended — or approved with conditions

Once the underwriter thoroughly reviews your application, the best outcome is that you are approved for a mortgage. That gives you the all-clear to proceed to closing on the property.

However, you might receive one of these decisions:

  • Denied: If your mortgage application is denied, you’ll need to understand the specific reason for the denial to determine your next steps. If the lender thinks you have too much debt, you might be able to lower your DTI ratio by paying down credit card balances. Or, perhaps your credit score didn’t make the cut. Recheck your credit report for mistakes and take steps to improve your credit score. Possibly you could apply again in a few months, apply for a smaller loan amount, or try to assemble a larger down payment.
  • Suspended: This might mean some documentation is missing from your file so the underwriter can’t evaluate it. Your application could be suspended if, for example, the underwriter couldn’t verify your employment or income. The lender should tell you whether you can reactivate your application by providing additional information.
  • Approved with conditions: Mortgage approvals can come with conditions such as: additional pay stubs, tax forms, proof of mortgage insurance, proof of insurance, copies of marriage certificates or divorce decrees or copies of business licenses.

Once you clear any conditions and get your mortgage approved, your home purchase is almost complete.

The final step is closing day. The closing is when the bank funds your loan and pays the selling party in exchange for the title to the property.  This is when you’ll sign the final paperwork and settle any closing costs that may be due.

Closing costs for a $200,000 mortgage with a 20 percent down payment average $2,084 nationwide, according to the latest Bankrate survey.

Once you sign all the mortgage documents, you’ll receive the keys and can call the movers to get you into your new home.