What Is Mortgage Underwriting?

Purpose and importance of mortgage underwriting

The purpose of mortgage underwriting is to determine whether a potential borrower can reasonably be expected to make mortgage payments if they’re approved for a loan, and that they can afford the home they’re trying to buy.

By determining whether the buyer can afford to make monthly mortgage payments, the underwriter can help prevent the buyer from entering into a loan that they might default on, and the lender from having to deal with the fallout of the buyer’s missed mortgage payments.

Waiting to hear whether you were approved after the underwriting process may be an exercise in patience, but it can save both you and your lender trouble down the road if it seems like you need to make some adjustments, such as save for a bigger down payment or improve your debt-to-income ratio (DTI) before purchasing a home.

How mortgage underwriting works

According to Jason Lerner, a branch manager with First Home Mortgage in Baltimore, a mortgage underwriter’s main job is reviewing a borrower’s qualifications and documentation to ensure their application fits into a mortgage program’s guidelines.

When you apply for a mortgage, the loan underwriter acts behind the scenes to help the lender determine whether to approve your loan. You’ll probably never meet the underwriter in person. Instead, they’ll ask the loan officer to relay any questions they have for you.

The loan officer’s job is to help facilitate the loan process and act as a go-between for you and your mortgage lender. They can answer any questions you have about your loan application and ensure that you’ve supplied the proper documentation to the underwriter.

While the loan officer and other loan professionals may look over your file, Lerner said, the underwriter is responsible for providing an unbiased and deeper review, and the underwriter will complete the final approval of the loan.

Manual vs. automated mortgage underwriting

Automated underwriting relies on technology and various computer algorithms to underwrite loans, whereas manual underwriting involves a human evaluating the loan application.

The automated underwriting process is typically faster, so you may know whether you’re approved for a loan sooner. But manual underwriting can be beneficial if you have a complex or unique financial situation.

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What factors do mortgage underwriters consider?

Underwriters examine multiple things, including the borrower’s credit history, income, assets, debt and employment history, along with the home's value. The underwriting process is primarily focused on assessing:

• Capacity: This factor uses income and other debts to determine if the borrower can afford to repay the loan.
• Character: Applicants can score well in this category by having a stable work history and a solid credit score.
• Collateral: A home’s value is assessed through a home appraisal to determine if the property supports the amount being borrowed.
• Conditions: This factor considers whether the applicant can meet other conditions for borrowing, such as having enough cash reserves and an appropriate DTI ratio.
• Credit history: The applicant's credit history plays a major role in whether they can get approved for a home loan.

What is the mortgage underwriting process?

Mortgage underwriting can take anywhere from a few days to a few weeks to complete. Lerner said the timeline for the process can be influenced by the complexity of the loan, the completeness of the loan package and the workload of the underwriter.

From start to finish, the underwriting process has four key steps: financial review, home appraisal, title search and approval or denial.

Step 1: Financial review

The underwriter will review a wide range of financial documents, all of which help them make recommendations to lenders. This first step typically takes about one to two weeks, and it may involve requests for additional documentation.

Proof of your identity

You’ll need to provide proof of your identity, including your Social Security number and signed permission for the underwriter to obtain your credit report.

Credit report

The underwriter will obtain recent copies of your credit report from the main three credit bureaus: TransUnion, Equifax and Experian. How each bureau determines credit scores may be different. If your scores vary across the reports, the underwriter may use the median. The credit score required for a loan depends on factors including the lender and the mortgage type.

» MORE: What credit score is needed to buy a house?

Financial documents

An underwriter looks at documents such as your W-2s, tax returns, bank statements, pay stubs and investment account statements to analyze your income, debts and assets. They use this data to calculate your debt-to-income (DTI) ratio, which is your total monthly debt payments divided by your gross monthly income.

Most lenders look for a DTI ratio of 36% or lower for a conventional mortgage loan, although it’s possible to get approved with a higher DTI ratio if you meet credit score and cash reserve requirements.

Additional documentation

At some point, the lender may ask you to write a letter explaining something in your financial details, such as a negative mark on your credit report or a gap in your employment history. Just because you’re asked for one of these explanation letters doesn’t mean you’re going to be denied a loan.

Step 2: Home appraisal

Your lender will order an appraisal prior to closing. The appraiser will inspect the condition of the home and review comparable home sales to determine the home's approximate value.

Underwriters use this information to ensure the home is at least worth what they’re lending. If the appraised value is less than the mortgage amount, the underwriter may suspend or deny the loan application.

Step 3: Title search

The underwriter will require a completed title search before the closing. The title search protects both the lender and the buyer from future ownership claims that could compromise their investment in the property. This step ensures that the legal ownership of the property can be successfully transferred from the seller to the buyer at closing.

Step 4: Approval or denial

Even if you receive preapproval early in the process, it doesn’t mean your loan will ultimately be approved. The underwriter must be satisfied with the appraisal, the title search results and your financial information.

As long as you meet the credit, capacity and collateral requirements, you’ll receive a verified approval before closing. Once you’re approved, the funds will be yours to transfer to the seller at closing.

If you’re denied, you’ll typically need to make some financial changes to get back on track and have your mortgage approved. For example, you may have to pay off debts, save up a larger down payment, reduce the amount you plan to borrow or increase your credit score before applying for a mortgage again.

Common reasons for mortgage underwriting denial

Home loans may be denied due to factors discovered during the underwriting process. These can include:

• You don’t meet the loan qualifications: Make sure that you meet a lender’s loan qualifications before applying for a mortgage.
• You didn’t submit all the requested information: If you don’t submit all of the requested information, your underwriter won’t be able to get an accurate picture of your financial situation.
• You submitted false information: Do not submit untrue or exaggerated information in your application.
• Your credit score dropped: If your credit score dropped during the underwriting process, this could be a red flag to lenders.
• Your debt increased: Taking on new debt before or during the closing process will increase your DTI ratio.
• Your income changed: An underwriter might be hesitant to extend a loan to you if you’ve recently lost a job or you’ve switched jobs a lot.

FAQ

Bottom line

Underwriting is an integral part of the mortgage process since it helps the lender know for sure if you’re eligible and financially ready for a home loan. This process will typically go smoothly as long as you’ve accurately and truthfully filled out your loan application and you can easily back up claims about your assets, credit and income. Be sure to respond to requests for information quickly to ensure that you receive an approval decision in time to buy your new home.