What is Mortgage Underwriting?
Mortgage underwriting is when a lender examines your credit, your finances and your desired house to determine if they will provide a home loan to you. The process can take several weeks and you’ll need to coordinate with the loan officer to provide documents as requested. Still, the mortgage underwriting process should be worth it when you have the keys to your new house in hand.
What do mortgage underwriters consider?
Mortgage underwriters consider the “three C’s” in an application: credit, capacity and collateral. When underwriters review your credit, they’re looking at your loan history. When they review your capacity, they’re looking at your current finances. And when they consider the collateral, they’re looking at what your house is worth in case, in the future, you’re unable to make the payments. All of this information is used to determine if providing you a loan is a good investment choice for them.
Credit
Lenders will pull your credit report from one or more of the three major U.S. credit bureaus. But they’ll look at more than just your credit score — to get a holistic view, they’ll also consider your:
- Payment history
- Age of accounts
- Type of accounts
- Amounts owed
It’s more favorable if you have a long history with several types of loans that you’ve paid on time every month. Underwriters look at this to help determine if you’re likely to repay a mortgage loan. You can check your credit score and history at freecreditreport.com.
Learn more about how to improve your credit score.
Capacity
Underwriters will also evaluate your budget capacity, which is your ability to handle the mortgage payment. They will look at your:
- Debt-to-income (DTI): Lenders will look at how much you make and how much you spend each month. A good DTI ratio is 35% or less.
- Total assets: Sizable savings is seen as a sign of good financial health — and a retirement account and an investment portfolio could be icing on the cake.
- Employment: Lenders will confirm your employment status. They prefer to see that you have been employed in the same role or same industry for the past two years as it’s a sign of financial stability.
Read more about tips for how to save for a house.
Collateral
The value and condition of the house you’re buying matters to you and the lender.
- Loan-to-value (LTV). The LTV is how much you want to borrow compared to how much the house is worth. The lender doesn’t want to lend more money than what they could sell the house for if you defaulted on the loan. So, as part of the mortgage application process, the lender will require a home appraisal to estimate the house’s value.
- Loan requirements. Some mortgages — such as FHA loans, which are backed by the Federal Housing Administration — require that a house meet minimum legal standards for livability.
Learn more about the current mortgage requirements.
What is a mortgage underwriter?
A mortgage underwriter is a person whose primary job is to make sure you demonstrate an ability to repay your loan and meet all of the guidelines and requirements of the mortgage program you’re applying for. With the help of your loan officer, you need to provide the underwriter with enough evidence that you’re a good candidate for the mortgage.
How does the mortgage underwriting process work?
As a mortgage loan applicant, the mortgage underwriting process involves five steps:
1. Apply
After you shop around for your best mortgage loan rates, you’ll need to fill out some paperwork and provide documentation. Some things you may need to provide include:
- Government-issued identification
- Proof of income
- Proof of current residency
- Statements of assets and debts
2. Get an appraisal
Lenders commonly require a mortgage appraisal. You can ask your real estate agent for a recommendation. You’ll likely have to coordinate with the appraiser, as they’ll need to view the exterior and interior of the property.
3. Order a title search
It’s always smart to get a title search done. A title officer researches the property’s legal and financial history to ensure there are no liens on it from a previous owner, or anything else that could create a mess and impinge upon your property rights. We also recommend getting title insurance.
4. Await the decision
Patience may be needed at this step. It typically takes 45 days for an underwriter to make a decision, but it may take longer. The decisions you may receive are:
- Approved: Everything is good to go and you are approved for the home loan.
- Denied: You are not approved for the mortgage. Review the decision document or talk with your loan officer to discover why.
- Suspended: Documentation is missing from your application.
- Conditionally approved: If you meet set conditions — such as making specified home repairs within a time window — you’ll be approved for the mortgage.
Read more about what to do if you’re denied credit for a home loan.
5. Close with confidence
When you are approved and all your ducks are in a row, go to the mortgage closing process with confidence. Read the contract carefully and ask any questions that pop up — then sign on the dotted line with panache.
How long does mortgage underwriting take?
The mortgage underwriting process often takes up to 45 days but could take longer. Quickly responding to any requests from the underwriter can speed the process.
What can you do for a smooth underwriting process?
Here’s how to prepare so you can have a smooth underwriting process when you apply for a mortgage loan.
Be honest about your finances
Don’t inflate your income or minimize your debt. Things can go more smoothly and quickly when the numbers you provided match what the underwriter finds.
Budget for an affordable home
Set a house price that you can comfortably afford because you’re likely to have that mortgage payment for a long time. Try using our mortgage calculator below to help you. Remember: You want to leave room in your budget to afford things like a vehicle payment, living expenses and a savings account contribution.
Have your documents organized
It can be stressful to rifle through boxes of papers looking for one document, especially when you want to respond to the underwriter quickly. Organize your documents — both physical and electronic — so when you need to find that one thing, you can easily do it.
Shape up your credit
Your credit score is an important part of your mortgage application and something the underwriter will consider. Work on maintaining or improving your credit prior to applying for a home loan.
Save a large down payment
A mortgage down payment can improve your chances of being approved and lower your monthly payment. The traditional rule of thumb is to have a 20% down payment, but the minimum for a conventional mortgage is 3% and some loans, like VA loans, allow for as little as zero down.