What Is The Mortgage Underwriting Process?

What is mortgage underwriting?

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

During underwriting, a mortgage underwriter — who works for the lender — verifies and assesses the information in your application, including your income, cash reserves, investments and debts.

Many lenders closely follow underwriting guidelines issued by Fannie Mae and Freddie Mac, the government-sponsored entities that back and buy mortgages on the secondary mortgage market. This makes these mortgages eligible for purchase by Fannie Mae and Freddie Mac after closing.

What is a mortgage underwriter, and what do they do?

By evaluating your finances, a mortgage underwriter measures the amount of risk the lender will assume if it lends you money. It then decides whether this risk is acceptable — and thus, whether to approve or deny your loan.

To make this decision, a mortgage underwriter reviews your credit history and credit score, as well as your finances and the results of a home appraisal. You can read more about each of these steps below.

Steps in the mortgage underwriting process

1. Preapproval

A mortgage preapproval is a thorough vetting process in which a lender decides how much it is likely to loan you, and 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 to verify your credit, income, assets and employment status. The underwriter will also determine if your finances meet the lender’s requirements and if you’ll likely be able to repay the loan.

For example, a conventional, fixed-rate mortgage backed by Fannie Mae often requires a minimum 620 credit score, a maximum 36 percent debt-to-income (DTI) ratio and at least a 3 percent down payment — also called a 97 percent loan-to-value ratio, or LTV. The lender may also add their own requirements and consider your savings, investments and whether you will earn income off the property by renting it to tenants or plan to use it as a primary residence.

3. Property appraisal

A home appraisal is an evaluation of the property’s worth conducted by a certified appraiser. This ensures 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 even need to walk away from the deal.

4. Title search and title insurance

Before a lender approves your loan, an underwriter must make sure the house can be legally transferred to you. A title company researches the property’s history, on behalf of the lender, to uncover:

• Existing mortgages
• Claims or liens
• Easement rights
• Zoning ordinances
• Pending legal actions
• Unpaid property taxes
• Restrictive covenants

If issues come up during the title search, you have a few options:

• Ask the seller to fix the problem before closing
• Request compensation from the seller to address the issue yourself
• Walk away from the purchase

The insurer then issues a title insurance policy that guarantees the accuracy of its research. A policy that protects the lender is almost always required, but you may choose to buy a separate policy that also protects you, the buyer.

5. Decision

If the mortgage underwriter is satisfied with your application, 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, though, you might receive one of these decisions instead:

• Denied: If your mortgage application is denied, find out why before taking any next steps. For example, if the lender thinks you have too much debt, you may reapply after paying down some of your balances.
• 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: A conditional approval means your loan will be approved if you meet 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 your mortgage is 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.

How long does mortgage underwriting take?

Underwriting is typically the most time-consuming part of the home financing process, taking between 40 and 50 days in many cases. However, it can take more or less time, depending on whether the underwriter needs more information from you, how busy the lender is and the lender’s specific underwriting practices.

You also have a part to play: The more quickly you compile your documents and respond to the lender’s requests for information, the more quickly you can receive a decision on your loan.

Another factor is whether the underwriter uses a manual or automated process. Automated underwriting is usually faster than manual underwriting. However, it’s not ideal for borrowers with unique circumstances, such as inconsistent income. Sometimes, lenders use a mix of both to gauge risk.

Tips for a smooth mortgage underwriting process

The mortgage underwriting process can be complicated, but there are things you can do to help it go more smoothly. Take these steps — starting at least several months before you intend to apply — to help things along.

1. Get your credit in shape

Having a lower credit score can mean you’re denied a mortgage or you’re approved at a higher interest rate. You can enhance your creditworthiness by:

• Paying down existing debts
• Avoiding applying for new loans
• Improving your DTI 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 means the lender could lose more money if you default on the mortgage. Lower your LTV by:

• Making a larger down payment
• Asking family or friends for help with down payment funds, either as a gift or personal loan
• Exploring down payment assistance programs
• Opening a high-yield savings account to grow your savings more quickly
• Automating regular savings to go from your checking account directly into savings
• Considering borrowing from your 401(k) or withdrawing from an IRA under special homebuyer provisions

3. Have your documents organized

The best way to keep the mortgage underwriting process on track is to have all of your financial documents in order before you apply, including:

• Employment information from the past two years
• W-2s from the past two years
• Pay stubs from 30 to 60 days prior to when you apply
• Account information, including for checking, savings, money market, CDs, investment and retirement accounts
• Additional income information, such as alimony or child support, annuities, bonuses or commissions, dividends, interest, overtime payments, pensions or Social Security payments
• A gift letter if you’ve been given funds from friends or relatives to make your down payment

A lender may require additional or different documentation if you’re self-employed, such as business records and tax returns.

4. Be honest about your finances

Mortgage underwriters do a deep dive into your financial history, so be honest on your application. If you have a negative mark on your credit report, like a missed payment, say so and explain what happened. The lender might be more lenient with a delinquency if, for example, you were dealing with extenuating circumstances and later made good on the payment.

FAQ

• How does the state of the housing market affect 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?
  

  Underwriting delays can stem from issues like unexplained gaps in your employment history; large, unexplained deposits in one of your accounts or a low home appraisal. To prevent these issues, be prepared with all necessary documents and respond quickly to lender inquiries.

• 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. Giving your underwriter two years of tax returns, bank statements and business records should be sufficient.

Additional reporting by Kacie Goff