Beginner's guide to the mortgage underwriting process

When you apply for your first home loan, you won't get a final loan approval because the underwriting process, which determines your risk level as a borrower, can take a few weeks to complete. During the underwriting process there are some important steps to getting your mortgage application approved like verifying your income, getting an appraisal for the house you want to buy, providing financial documents and so on.

So how does the process work, and how can you increase the chances of being approved? Learn what to expect and how to prepare for the home loan underwriting process in this guide.

What is mortgage underwriting?

Mortgage underwriting is when your lender reviews your home loan application and assesses how risky it would be to lend you money. Before approving your application, your lender has to determine your creditworthiness and the likelihood that you'll be able to pay back your loan.

To complete this process, lenders typically review the following (PDF)

• Mortgage Amount: Lenders divide the mortgage amount by the lesser of the sales price or appraised value of the home to determine your loan-to-value ratio (LTV). If your LTV is over 80%, you may have to pay private mortgage insurance (PMI). The yearly cost of PMI is about 1% of your loan balance and is usually added to your monthly mortgage payment.
• Appraisal: Lenders order an appraisal to confirm the market value and condition of the home. An appraisal also verifies the type of property, since many lenders only offer mortgages for owner-occupied or rental properties with four units or fewer.
• Assets: Your lender needs to know if you can afford closing costs, the down payment and other fees needed to buy a home. To confirm you can afford these fees, lenders review your liquid assets, along with other types of assets such as marketable securities.
• Credit history: Lenders pull credit reports from one or more of the three main credit bureaus and review your credit score, payment history, the age of your accounts, amounts owed and the type of accounts you have.
• Employment history: In most cases, lenders prefer borrowers who have worked in an industry or a role for at least two years. This can help them estimate how much longer you can expect to work in the same role and receive a similar income.
• Income: Lenders review your income to confirm that you can afford the monthly mortgage payment. They calculate your debt-to-income ratio (DTI) by dividing your new proposed monthly housing obligations and total monthly debt payments by your monthly pretax income.
• Loan type: Many lenders offer conventional mortgages and home loans issued or guaranteed by the Federal Housing Administration (FHA), United States Department of Agriculture (USDA) or Department of Veterans Affairs (VA). Government-backed loans may have additional rules.

After considering all these factors, the underwriter makes a final decision. The underwriter could approve, deny or suspend your application based on their assessment of your creditworthiness.

This process is essential for lenders. If the underwriter determines that a borrower is creditworthy, the lender can confidently accept a low level of risk when extending a home loan.

Mortgage underwriting is also important for borrowers, especially if you're a first-time homebuyer. If your home loan is approved, that means your lender is confident you can afford to buy a house and pay off your mortgage on time. If your loan is denied, you may need to improve your finances before taking out a mortgage.

5 steps to the mortgage underwriting process

The underwriting process for home loans has five basic steps. Here's what to expect:

1. Apply for a mortgage

The first step is filling out an application online, over the phone or in person. When you apply for a mortgage, you're giving your lender permission to pull your credit, look over your financial information, order an appraisal on the home and start a title search.

2. Provide proof of your income, assets and debts

When you fill out a mortgage application, you need to provide your income, assets and debts. Most lenders also ask for documents to verify this information such as W-2s, paystubs and bank statements.

Sometimes, your lender will ask for these documents when you submit your application. Other times, they may call you to get more documents during the underwriting process.

3. Assist with the appraisal

Once the seller accepts your offer to buy their home, your lender orders an appraisal. The appraisal confirms the market value of the home and verifies that the property is in a safe and livable condition.

To get the appraisal process started, you have to give your lender a copy of your purchase agreement. Your lender will contact the seller or their real estate agent to schedule the appraisal.

In most cases, the buyer pays for the appraisal, which is often included in the closing costs. The cost varies by the location and size of the property.

4. Wait for the title search

Along with arranging an appraisal, your lender orders a title search to confirm that the property is free from outstanding claims. A title company looks at the history of the property and checks for liens, public records, unpaid taxes or legal action.

Title companies also provide insurance policies that back up their research. In many states, title companies issue a policy to the property owner and another to the lender.

Like the appraisal fee, the cost of the title search and insurance is usually paid by the borrower. In most cases, these fees are included in your closing costs.

5. Await the decision

All that's left to do now is wait for the underwriter's decision, which will be one of the following:

• Approved: You can work with your lender and your real estate agent to close on the property. If it's approved with conditions, you may have to provide more paperwork before moving forward.
• Denied: You can't get a mortgage right now. Ask your lender for more details so you know what you need to do to improve your chances of being approved next time. For example, you may need to demonstrate longer job stability, pay down debt or improve your credit score.
• Suspended: The underwriter can't complete the process because your application is missing materials. Ask if you can reopen the application after providing the missing information.

How long does underwriting take?

The underwriting process may take a few days, or it could take a few weeks. There's no standard time period for this part of the mortgage process. The length of the underwriting process depends on a few factors, including:

• Your financial situation: If your financial situation is complicated and you have a lot of income sources, assets and debts, the process may take longer since the underwriter has to verify each part of your financial picture.
• Your home loan type: Some mortgage types may have stricter requirements, which can take more time to complete. For example, government-backed FHA, USDA or VA loans may have more complex rules.
• The completeness of your application: The process takes longer each time the underwriter asks you to provide an additional document. If your application is complete when you first submit it, the underwriter can work more quickly.
• The appraisal or title search process: Delays with the title search, title insurance and appraisal process can all make underwriting take longer.
• The state of the housing market: Applying for a mortgage during the homebuying busy season can make the underwriting process longer. Your underwriter may have several applications to process at once, which can increase your wait.

How to improve your underwriting experience

When you apply for a mortgage, you want the underwriting process to go as smoothly as possible. To improve your experience, follow these simple tips:

• Review your finances: Add up your monthly debts and proposed housing expenses and divide it by your gross monthly income to calculate your DTI. Then get a free credit report to check your credit score. Then see how much you need for a down payment so you can avoid paying PMI.
• Get prequalified: Talk with your lender about getting prequalified for a mortgage up to a certain amount. A prequalification helps you know how much you can afford and whether your finances are on the right track.
• Respond quickly: The underwriting process often involves a lot of paperwork. You can expect your lender to contact you for more information at least once. Be prepared to provide or locate documents quickly to avoid delays.

After reading this guide, you may have specific questions about your underwriting process. Contact your Home Lending Advisor to get answers to your questions online, over the phone or in person. Your Home Lending Advisor can even offer suggestions to improve your financial picture to help you qualify for a mortgage.