What Is Mortgage Underwriting?

If you’re taking out a mortgage to buy a house, you must go through the underwriting process before you can close on your loan. Mortgage underwriting involves a thorough assessment of your finances to determine your mortgage eligibility. The good news is if you get through underwriting, you’re one step closer to becoming a homeowner.

How does mortgage underwriting work?

Essentially, mortgage underwriting is an assessment of your financial picture to determine the level of risk involved in lending to you. Another crucial part of underwriting is verifying the information in your mortgage application, including your income, savings and debts.

During the mortgage underwriting process, an underwriter reviews your financial situation with a fine-tooth comb to determine if you’re a good investment for the mortgage lender. The primary question underwriters are trying to answer is whether you can repay the mortgage. Think about it: If a lender approves you for a loan you can’t afford, it’s a lose-lose situation — you’re stuck with a loan you’re struggling to manage, and the bank is stuck with a bad investment.

To get a clearer idea of the risk you pose to the lender, underwriters look at various aspects of your financial situation, including your:

→ Credit history
→ Debts
→ Income
→ Savings
→ Investment accounts

Once an underwriter reviews these factors, they can make a lending decision.

What happens during the mortgage underwriting process?

1. Mortgage application. The first step is to complete a mortgage application and provide supporting documents, including government-issued identification and proof of income and savings. Documentation requirements vary by lender and loan type but typically include bank statements, W-2s and pay stubs.
2. Underwriting. The underwriter will verify your application details and look at various factors, like your credit score and debt-to-income (DTI) ratio, to evaluate your ability to repay the mortgage. Your DTI ratio tells underwriters how much of your income is allocated to repaying your debt. For example, if your DTI ratio is 50%, it means half of your income goes toward your debts. A “good” DTI ratio is generally 35% or less.
3. Home appraisal. Reviewing the home appraisal report is one of the most important parts of the underwriting process. An appraisal determines a property’s value, taking into account factors such as location, size and features. In terms of underwriting, the purpose of the appraisal is to ensure the mortgage loan amount doesn’t exceed the home’s value.
4. Title search. Another crucial aspect of underwriting involves confirming the property’s legal readiness for sale, which is achieved through a title search. A title company will conduct research on the home, ensuring there are no court orders, liens or other encumbrances on the property. Your underwriting team will review the title company’s findings as part of their assessment.
5. Application decision. Once the underwriting process is complete, you’ll typically receive one of three lending decisions: Approval, denial or pending. An approval means you’ll proceed to the closing process. A pending decision may mean the lender needs additional information. If denied, you should receive an explanation detailing why your application wasn’t approved.

How long does mortgage underwriting take?

Mortgage underwriting generally takes anywhere from a few days to a few weeks. If you provide all of the necessary documents, the turnaround time should fall on the shorter end of the range. The amount of time underwriting takes also depends on whether the lender uses manual or automated underwriting. Since manual underwriting is done by a person rather than a computer, the process can take a bit longer.

How can you prepare for mortgage underwriting?

Here are some tips to help set you up for the best chances of success during the underwriting process.

Organize your important paperwork

Providing the right documents upfront can help you avoid underwriting delays and additional information requests. If you’re unsure of which documents you’ll need, your lender or real estate agent can provide guidance.

Examples of documents the underwriter may need include:

→ Government-issued ID to verify your identity
→ Bank statements to ensure you have enough savings for the down payment and collateral in case of mortgage default
→ W-2s, pay stubs and tax returns for proof of income
→ Proof of any other sources of income, such as rental income from an investment property or dividends from stocks or bonds
→ Profit and loss statements (if you’re self-employed)

Limit new credit applications

Applying for new credit cards can raise concerns about your financial stability and potentially lower your credit score. To avoid issues with your mortgage application, it’s best to avoid opening new cards during the underwriting process.

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Respond promptly to lender requests

It’s important to respond promptly to requests to avoid delays. Your lender may need additional information or have questions for you during the underwriting process. In some cases, you may need to provide a letter of explanation with additional details about your situation.