Understanding the mortgage underwriting process

If you’re like most people who buy a home, you’ll need a mortgage to finance the purchase. And that means filling out an application and waiting to see if you’ll be approved.

The process that lenders use to determine whether to approve you for that loan is called underwriting. Underwriting is a mortgage lender’s method of assessing your creditworthiness and the risk of lending money to you.

Here’s a guide to understanding the underwriting process, from the steps involved in the process to how long mortgage underwriting takes.  

What is mortgage underwriting?

Mortgage underwriting is the process the bank, credit union or mortgage lender uses to determine whether you are likely to be able to pay back a home loan before deciding to approve your mortgage application.

Before underwriting, a loan officer or mortgage broker collects various documents necessary for your application. An underwriter then verifies your identity, checks your credit history and assesses your financial situation, including your income, cash reserves, investments and debts: in short, all your financial assets and liabilities.

Many lenders closely follow underwriting guidelines issued by Fannie Mae and Freddie Mac, the two government-sponsored entities that back and buy mortgages on the secondary market.

What does a mortgage underwriter do?

A mortgage underwriter primarily decides how much risk the lender is assuming if it approves your loan. To that end, they go through a series of steps that allow them to evaluate your finances and the likelihood that you can repay the loan on time.

An underwriter will:

• Look at your credit history. This includes an investigation of your credit report, credit score and payment record.
• Examine your finances. Lenders use certain federal guidelines as a basis for financing. For instance, Fannie Mae’s conventional loan guidelines require that all borrowers have a maximum loan-to-value (LTV) ratio of 97 percent, credit score of 620 or higher and a maximum debt-to-income (DTI) ratio of 36 percent. The lender may supplement these with its own criteria. They’ll also look at the particulars of your financial situation. For instance, they may consider your financial reserves (investments, assets or savings) or — if it’s an income-producing property — whether you will occupy the property along with your tenants.
• Order a property appraisal. Your loan approval depends in large part on the amount of money you’re asking to borrow versus the value of the home you’re buying (and using as collateral). To that end, an underwriter will order an appraisal of the property to see if the asking price is in line with similar homes recently sold in your area.
• Make the decision to approve or deny your application once all the reports and paperwork are in.

Steps in the mortgage underwriting process

Underwriting can be a long process that requires a thorough examination of your finances and the property you want to buy. It officially begins after you make an accepted offer on a home and commit to it in writing with the seller. Then, when you formally apply for a mortgage, the lender initiates the underwriting.

It can be easier to apply with the lender that preapproved you since they’ll already have a lot of your financials. But still, make sure that you take the time to shop around and compare offers from multiple lenders. Even a small difference in the interest rate can result in huge savings over the long run.

Each lender uses slightly different methods, but the five major steps of underwriting typically include:

1. Getting preapproved

Your very first step — even before you start looking for a home — is to get preapproved for a mortgage. This technically isn’t part of the underwriting process, but it is still a highly recommended preliminary move to make. You’ll submit your financial information (much of which will be used later for your actual mortgage application) and get a sense of the size of the loan you’ll be able to qualify for.

To determine whether to preapprove you, a lender will review your financial profile, such as your income and your debts, and run a credit check.

If you’re deemed qualified, your lender will issue a preapproval letter stating that it is willing to lend you up to a certain amount based on the information you provided. A preapproval letter shows the seller that you’re a serious buyer: You have the financing to back up any offer you make.

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.

2. Income and asset verification

Once you’ve made an offer on a home and the seller accepts it, you’re ready to officially apply for a mortgage. You’ll submit the application after signing the purchase and sale agreement with the seller. Use Bankrate’s mortgage calculator to figure out how much money you’ll need.

You’ll submit many of the same documents that you submitted for the preapproval, but the lender will now dive deeper into your finances. While they often use the preapproval paperwork, the lender may ask for more information or updated documents. For example, you might need to send a more recent financial statement or tax return, or let the lender check your credit score again.

Be prepared to have your income and assets verified. Assets that a lender will consider include money in your bank accounts, retirement savings, your investment accounts, the cash value of your life insurance policies and ownerships in business or partnerships where you have assets in the form of stock.

3. Appraisal

The lender will want to confirm that the property you want to buy is worth what you’re paying — and asking to borrow — to make sure it can serve as sufficient collateral for the loan.

To that end, the 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 property’s size and complexity.

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, they will hopefully approve you 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.
• Conditional approval: Mortgage approvals can come with conditions — usually, 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. Typically, this is just a hiccup: You’re almost home, but the lender just wants to confirm a few more things.

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

How long does mortgage underwriting take?

The mortgage underwriting process can take anywhere from a few days to a few weeks. The timeline varies depending on whether the underwriter needs more information from you, how busy the lender is and how streamlined the lender’s practices are. It is one of the most time-consuming parts of the home purchase process and one reason closings can take so long. The quicker you compile your documents and respond to the lender’s requests for information, the smoother and speedier the experience can be.

Another factor is whether the underwriter is using manual or automated underwriting. Automated underwriting is usually completed faster than manual underwriting, but since a computer is doing the evaluation, 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, lenders use a combination of automated and manual underwriting in order to gauge risk.

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.

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.

Try to have the following ready when you apply:

• 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; investment accounts; retirement accounts
• Additional income information, such as alimony or child support, annuities, bonuses or commissions, dividends, interest, overtime payment, pensions or Social Security payments
• A gift letter if you’ve been given funds from friends or relatives to make your down payment

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. Work to improve your creditworthiness by:

• Paying down existing debts
• Avoiding applying for new loans
• Improving your debt-to-income (DTI ratio) (aim for 36 percent or less)
• Checking your credit report and disputing errors

3. Make a larger down payment

The underwriter also considers the loan-to-value (LTV) ratio of your deal: how much money you’re borrowing, also called the loan principal, divided by how much the property you want to buy is worth, or its value. 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. The larger the down payment you make, the easier it can be to qualify — because you’re asking to borrow less, essentially. Don’t be afraid to ask family or friends for help or look for down payment assistance programs.

4. Be honest about your financial history

Mortgage underwriters are doing a deep dive into your credit report and financial history. If you’re not entirely honest about your finances, they’ll find out. That will lead to them questioning other information you’ve provided, even if it’s factual, and could cause them to deny your loan application.

Instead of trying to obscure the truth to make yourself appear like a better borrower, be honest. If you have a negative mark on your credit report, like a missed payment, tell the lender and explain what happened.

For example, lenders might be more lenient with a missed payment if you were dealing with extenuating circumstances and later made good on the payment with that lender.

Additional reporting by T. J. Porter