Mortgage underwriting: What it is, process, and more
Quick insights
- Mortgage underwriting is the process your lender uses to review your application and decide whether or not to issue you the home loan.
- The mortgage underwriter will review the details of your requested loan and key financial factors like your credit history, assets and income as part of the review process.
- There is no standard processing time for underwriting, but it averages around three to four weeks.
When you apply for your first home loan, you won't immediately get a final loan approval. The mortgage underwriting process determines your risk level as a borrower and can take a few weeks to complete.
During this process, there are some important steps to follow, like verifying your income, getting an appraisal for the house you want to buy, providing financial documents and so on.
How does the process work, and what can you do to increase your chances of approval? 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 an underwriter (a person employed by your lender) reviews your loan application and assesses how risky it would be to lend you money for a home loan.
Before approving your application, your lender has to determine your creditworthiness and the likelihood that you'll be able to pay back your mortgage loan.
What does a mortgage underwriter look for?
To complete the mortgage underwriting process, lenders typically review the following factors:
- 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). Private mortgage insurance (PMI) typically costs between 0.5% and 6% of the original loan amount each year.
- 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 certain 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.
What is the underwriting process for a mortgage?
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 borrower usually pays for the title search and insurance.
In most cases, these fees are included in your closing costs.
5. Wait for 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 mortgage underwriting take?
The underwriting review 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. But the average time is three to four weeks.
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.
What happens after mortgage underwriting?
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 extend a home loan because they know their risk is low.
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.
How to improve your mortgage underwriting experience
When you apply for a mortgage, you want the underwriting process to go as smoothly as possible. To improve your experience, consider following these simple tips:
Have your documentation on hand
Have everything ready to go before you’re asked for it. Some key documents you’ll need for the mortgage underwriting process include:
- Proof of income: Paystubs, W-2 forms or tax returns (for self-employed individuals)
- Bank statements: Recent statements to verify savings and checking account balances
- Asset documentation: Proof of other assets, like investments or retirement accounts
- Debt information: Details of loans, credit cards or other liabilities
- Identification: Government-issued ID and Social Security number
- Property information: Purchase agreement and property appraisal
Review your finances
Add up your monthly debts and proposed housing expenses, then divide the total by your gross monthly income to calculate your DTI. Then get a free credit report to check your credit score. Next, see how much you need for a down payment so you can avoid paying private mortgage insurance (PMI).
Get preapproved
Talk with your lender about getting preapproved for a mortgage up to a certain amount. A preapproval helps you know how much you can afford and whether your finances are on the right track.
Don’t apply for any new credit lines
Avoid making any large purchases that might decrease your assets. Similarly, avoid applying for new lines of credit or loans, which can disrupt the process and create unnecessary delays.
Respond quickly
The underwriting process often involves a lot of paperwork. You can typically expect your lender to contact you for more information at least once. Be prepared to provide or locate documents quickly to avoid delays.
In summary
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.
