Understanding the mortgage underwriting process

What is mortgage underwriting?

Mortgage underwriting is the process the lender uses to determine whether to approve your mortgage application.

Before underwriting, a loan officer or mortgage broker collects credit and financial information for your application. A mortgage underwriter who works for the lender then verifies your identity, checks your credit history and assesses your finances, including your income, cash reserves, investments and debts.

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 mortgage market.

What does a mortgage underwriter do?

Primarily, the job of a mortgage underwriter is to measure how much risk the lender is assuming if it approves your loan. To that end, they evaluate your finances and the likelihood that you can repay the loan on time.

A mortgage 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 guidelines as a basis for financing. For instance, Fannie Mae’s conventional loan guidelines for fixed-rate mortgages dictate that borrowers have a maximum 97 percent loan-to-value (LTV) ratio (meaning they make at least a 3 percent down payment), a minimum 620 credit score and a maximum 36 percent debt-to-income (DTI) ratio. The lender may change or supplement these guidelines with its own criteria. It’ll also look at the particulars of your financial situation. For instance, it may consider your financial reserves (investments, assets or savings). If the loan is for an income-producing property, the lender also evaluates whether you will occupy the property along with tenants.
• Order a property appraisal. Your loan approval depends largely on the amount of money you’re asking to borrow versus the value of the home you’re buying. An underwriter will order a home appraisal to see if the the price you plan to pay is in line with its determined value.
• Make the decision. The mortgage underwriter will either approve or deny your application once all the reports and paperwork are in.

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.

Another factor is whether the underwriter uses a manual or automated underwriting process. 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 mix of automated and manual underwriting to gauge risk.

Underwriting is one of the most time-consuming parts of the home financing 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 underwriting process can be.

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

Steps in the mortgage underwriting process

1. Preapproval

A mortgage preapproval is a thorough vetting process that indicates how much a lender is likely to loan you, as well as at what interest rate. A preapproval is not a guaranteed loan offer, but rather an indication of your potential borrowing capacity. You’ll often need a preapproval to make offers on homes.

2. Income, asset and employment verification

The next step in the underwriting process is income, asset and employment verification. This step means the lender’s mortgage underwriter checks your credit and financial situation to confirm you’re capable of repaying the loan while also verifying your employment. You’ll need to submit documents such as W-2s, pay stubs and bank statements for verification. If you’re self-employed, you may need to provide more documents like tax returns and profit and loss statements.

3. Property appraisal

An appraisal is an evaluation of the property’s worth conducted by a certified appraiser. This is done to ensure that the amount you’re borrowing is in line with the value of the home you’re buying. If the home’s value falls short of the mortgage amount, you can try negotiating the price with the seller — but you’ll most likely need to pay the extra amount yourself. In some cases, you might need to walk away from the deal and restart the mortgage application and underwriting process with a new loan or different lender.

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 ownership of the property can be legally transferred to you.

The title company will research the property’s history, looking for mortgages, claims, liens, easement rights, zoning ordinances, pending legal action, unpaid taxes and restrictive covenants. If an issue arises with the title search, you have a few options. You can either see if the seller will fix the issue before closing day, request that the seller compensate you to fix the issue or you can walk away from buying the home.

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 (this is optional, but can be worth getting).

5. Decision

Once the mortgage underwriter is satisfied with your application, the appraisal and title search, your loan will be deemed clear to close. At that point, you can move forward with closing on the property.

If things don’t go smoothly, you might receive one of these decisions instead:

• Denied: If your mortgage application is denied, see what reason the lender gave for denying you before taking next steps. For example, if the lender thinks you have too much debt, you might be able to lower your DTI ratio by paying down credit card balances and then reapplying.
• Suspended: This might mean your file is missing some documentation. Your application could be suspended if, for example, the underwriter couldn’t verify your employment or income. The lender can tell you whether you can reactivate your application by providing more information.
• Conditional approval: This means your loan is approved, save for an outstanding condition, such as obtaining a homeowners’ insurance policy. Once you provide proof of what’s missing, you should be cleared to close.

Once you clear any conditions and get your mortgage approved, your home purchase is nearly complete. The final step comes on closing day, when the lender gives you the money, and you pay the seller. You’ll sign the final paperwork, settle any closing costs and receive the title and the keys to your new home.

Tips for a smooth mortgage underwriting process

The mortgage underwriting process can be complicated and time-consuming, but there are things you can do to help it go more smoothly. Take these steps — the first two several months, at least,  before you apply — to help the underwriting process along.

1. Get your credit in shape

A lower credit score can make it more difficult to get approved for a mortgage, and make your loan more expensive with a higher interest rate.

Work to enhance your creditworthiness by:

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

2. Save up for a larger down payment

The mortgage underwriter also considers the LTV ratio of your mortgage: how much money you’re borrowing, also called the loan principal, divided by the property’s 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 ratio by making a larger down payment upfront. The larger the down payment you make, the easier it can be to qualify.

Don’t be afraid to ask family or friends for help making a down payment — either as an outright gift or a personal loan. You can also look for down payment assistance programs you might qualify for. Ways to save include opening a high-yield savings account or automating a portion of your income to go to a savings account. You could also consider borrowing from your 401(k) or making an IRA withdrawal — there are special provisions for using funds for home-buying.

3. 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 30 to 60 days prior to when you apply
• Account information, including checking, savings, money market, CDs, investment accounts 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
• A gift letter if you’ve been given funds from friends or relatives to make your down payment

4. Be honest about your finances

Mortgage underwriters do a deep dive into your credit report and financial history, so don’t lie on your application. If you have a negative mark on your credit report, like a missed payment, tell the lender and explain what happened. The lender might be more lenient with a delinquency if you were dealing with extenuating circumstances and later made good on the payment.

Mortgage underwriting FAQ

• How does the state of the housing market affect the duration of the underwriting process?

  A booming housing market might lead to longer underwriting times due to a higher number of loan applications. In contrast, a slower market might mean quicker reviews. To avoid delays, submit an accurate and complete application and respond swiftly to any requests for additional documents.

• What can cause delays in the underwriting process, and how can these be avoided?

  Underwriting delays can stem from issues like unexplained gaps in your employment history, unverifiable funds or a low home appraisal. To prevent these issues, be prepared with all necessary documents, respond quickly to lender inquiries and ensure your financial documents are comprehensive. Keeping open lines of communication with your lender and being organized can help avoid many common delays.

• What additional steps should a self-employed individual or business owner expect in the underwriting process?

  Without an employer to verify that they pay you consistently and the pay stubs to prove it, self-employed people need alternative routes to prove their income and get a mortgage. If you’ve been doing the same type of self-employed work for the last couple years, collecting two years of tax returns, bank statements and business records to hand over to your mortgage underwriter should be sufficient.

Additional reporting by Kacie Goff