5 key steps in the mortgage underwriting process

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If you’re like most people who buy a home, you’ll take out a mortgage to finance the purchase. The process that mortgage lenders use to assess your creditworthiness and determine whether to approve you for that loan is called underwriting. Here is what you need to know about the mortgage underwriting process.

What is mortgage underwriting?

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

Before underwriting, a loan officer or mortgage broker collects the many documents necessary for your application. An underwriter then 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 lenders closely follow underwriting guidelines from Fannie Mae and Freddie Mac.

Automated underwriting vs. manual underwriting

A mortgage underwriter can assess your loan application manually or run it through a software program, known as automated underwriting, to determine whether to approve you for a loan.

Automated underwriting is usually completed faster than manual underwriting, but since a computer is doing the evaluating, it has some limitations that might not make it ideal for borrowers with unique circumstances, such as inconsistent income. In these cases, it can be easier to qualify a borrower through manual underwriting as opposed to an automated system.

Sometimes, too, lenders use a combination of automated and manual underwriting in order to gauge risk.

What does a mortgage underwriter do?

A mortgage underwriter’s job is to assess delinquency risk, meaning the overall risk that you will not be able to repay the mortgage. To do so, the underwriter evaluates factors that help the lender understand your financial situation, including:

  • Your credit score
  • Your credit report
  • The property you intend to buy

The underwriter then documents their assessments and weighs various elements of your loan application as a whole to decide whether the risk level is acceptable.

Here’s an example from Fannie Mae’s underwriting guidelines. For a single-family home that’s to serve as a primary residence, assume the lender typically requires the following:

If a borrower falls short in one area, the loan might still be approved based on the strength of the other two factors, and/or factors such as:

  • Whether you will occupy the property
  • Amortization schedule
  • Type of property and how many units it has
  • Financial reserves or assets (e.g., investment accounts, retirement accounts, savings in the bank)

So, if you had a higher DTI — say 40 percent — you might get approved for a mortgage as long as you have a better credit score. If your LTV ratio was lower than 97 percent, you might be able to get mortgage approval even with a lower credit score, like 620.

How long does mortgage underwriting take?

The mortgage underwriting process can take anywhere from a few days to a few weeks, depending on whether the underwriter needs additional information from you, what demand is like for the lender and how streamlined the lender’s practices are. The quicker you compile your documents and respond to the lender’s requests for information, the smoother and speedier the process can be.

Keep in mind, however, that underwriting is just one part of the overall lending process. You can expect to completely close on a loan in 40-50 days.

How strict is mortgage underwriting?

In 2020, 9.3 percent of applications for a home purchase loan were denied, according to Home Mortgage Disclosure Act data.

For the most part, mortgage lenders follow specific standards for the loans they originate.

For conventional loans, lenders adhere to Fannie Mae and Freddie Mac standards, because if a loan meets those requirements, the lender can sell it on the secondary market and use that capital to create more mortgages for more borrowers. For an FHA, VA or USDA loan, lenders follow the guidelines of the Federal Housing Administration, Department of Veterans Affairs and Department of Agriculture, which guarantee or insure those types of loans if the borrower defaults.

Lenders also have to account for the business of making mortgages — they can’t take on more risk than what their operation supports. So, in addition to baseline loan standards, lenders can impose additional requirements, known as “overlays.”

Sometimes, lenders implement stricter protocols in response to economic volatility. Throughout the pandemic, for example, many lenders began requiring higher credit scores and larger down payments.

That said, some lenders can be flexible, such as allowing a borrower to qualify based on assets instead of income.

Applying for a mortgage: What to expect

When you submit a mortgage application to a lender, you’ll need to include extensive financial documentation, such as W-2 forms, pay stubs, bank statements and tax returns. When underwriting the application, the lender might come back to you with questions about these documents or requests for additional information. Responding to these requests quickly will help speed up the mortgage underwriting process.

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

1. Getting preapproved

Your very first step — even before you start looking for a home — is to get preapproved for a mortgage. To determine whether you’re preapproved, a lender will review your financial information, such as your income and your debts, and run a credit check.

Keep in mind that getting prequalified and getting preapproved mean two different things. In general, a preapproval serves as an indication from a lender that you’ll be approved for a certain amount of financing — provided your financial situation doesn’t change. A prequalification is simply an indication you could be approved for a loan. Obtaining a preapproval usually requires you to furnish more information to the lender compared to a prequalification.

2. Income and asset verification

Be prepared to have your income verified and provide other financial documentation, such as tax returns and bank account statements. Assets that will be considered include money in your bank accounts, retirement savings, your investment accounts, the cash value of your life insurance policies and ownerships in business where you have assets in the form of stock or retirement accounts.

If you’re deemed qualified, your lender 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 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 an appraisal for a single-family home varies 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 (this is almost always required) and one to protect the property owner (optional, but can be worth getting).

5. Underwriting decision

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 instead:

  • 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. If your credit score didn’t make the cut, recheck your credit report for mistakes and take steps to improve your score. You could possibly apply again in a few months, apply for a smaller loan amount or try to assemble a larger down payment to compensate.
  • Suspended: This might mean some documentation is missing from your file, so the underwriter can’t make an evaluation. 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 the need to furnish additional pay stubs, tax forms, proof of mortgage insurance, proof of insurance or a copy of a marriage certificate, divorce decree or business licenses.

Once you clear any conditions and get your mortgage approved, your home purchase is almost complete. The final step is closing day, which is when the lender 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, settle any closing costs that are due and receive the keys to your new home.

Tips for a smooth mortgage underwriting process

1. Have your documents organized

The best way to keep the mortgage underwriting process on track is to have all of your financial documents organized before you apply for a loan. If you have to request paperwork from a specific institution, for instance, do so as soon as possible. It can be smart to put together a file that includes the following:

  • Employment information from the past two years (if you’re self-employed, this includes business records and tax returns)
  • W-2s from the past two years
  • Pay stubs from at least 30 to 60 days prior to when you apply
  • Account information, including checking, savings, money market, CDs and retirement accounts
  • Additional income information, such as alimony or child support, annuities, bonuses or commissions, dividends, interest, overtime payment, pensions or Social Security payments

In addition, if you plan to use gifted funds for a down payment, it’s important to have those funds in your possession (in other words, in an account in your name) well before you apply. You’ll also need to have a gift letter to verify that the money is indeed a gift. Doing both can help you avoid unnecessary setbacks in underwriting.

2. Get your credit in shape

A lower credit score can make it more difficult for you to get approved for a mortgage, and can also make your loan more expensive with a higher interest rate. If your credit score needs improvement, commit to paying down debt. With less debt, your DTI ratio will be lower — many lenders look for 36 percent or less.

In addition, check your credit report to ensure there are no errors that could negatively impact your score. You can get a copy from the three major credit bureaus at AnnualCreditReport.com. If you do find a mistake, contact the agency to dispute it as soon as possible.

3. Make a larger down payment

A higher LTV ratio indicates the lender could lose a lot more money if you default on the mortgage. You can reduce your LTV by making a larger down payment upfront.

If you put 10 percent down on a $200,000 home, for example, you’d have to take out a $180,000 loan, putting your LTV ratio at 90 percent. If you were to put 20 percent down for the same home, you’d only need a $160,000 mortgage, and your LTV ratio would be 80 percent. This lowers the risk for the lender overall, making you a more attractive candidate for a loan.

You can work to save more for a down payment, or ask family or friends for help, if possible. There are also many down payment assistance programs, including deferred payment loans and grants, that can help, and your lender might offer their own assistance in addition to that. Chase Bank, for instance, offers up to $3,000 towards your down payment if you meet certain criteria.

Getting started

If you’re looking to get a mortgage and have all of your documents in order, you’re ready to start comparing loan offers. Ideally, you’ll want to find the loan with the lowest interest rate and fees and the most favorable terms.

As you shop around, consider what type of loan will suit your situation — some mortgages are better for lower-income borrowers, for instance, or those with poorer credit — in addition to how long you plan to stay in the home and what you can reasonably afford.

Learn more:

Written by
Jeanne Lee
Contributing writer
Jeanne Lee writes about mortgages, personal finance and enjoys finding ways for people to hack their finances.
Edited by
Mortgage editor
Reviewed by
Professor of finance, Creighton University
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