A Simple Guide to the Mortgage Underwriting Process

When most people think about what it’ll be like to buy their first home, they think about their ideal floor plan or how they want to decorate their home. But before you can even get to that point, you need to make it through the underwriting process.

couple meeting with mortgage broker

During the underwriting process, your mortgage lender evaluates whether you’re a good candidate for a mortgage. Going through underwriting may sound intimidating, but knowing what to expect can make the entire process run more smoothly.

Key Takeaways

  • Mortgage underwriting involves evaluating your credit, assets, income, and property appraisal to determine if you are eligible for a mortgage loan.
  • The process includes steps such as getting preapproved, having your home appraised, performing a title search, receiving your approval decision, and finally closing on your home.
  • Ensuring a smooth underwriting process involves providing accurate financial information, managing your debt level, and responding promptly to lender requests.

What is mortgage underwriting?

Mortgage underwriting is simply a method used by your lender to assess your eligibility for a mortgage loan. This evaluation is performed by reviewing your credit history, conducting a comprehensive analysis of your finances, and appraising the property.

After this, the mortgage lender will determine if you’re a suitable candidate for the loan. The majority of this process occurs discreetly, but your participation is vital.

As the borrower, it’s your responsibility to furnish your lender with all the financial information they require. By being transparent and forthcoming with information, you facilitate the lender’s decision-making process and increase the chances of approval for your mortgage application.

What does a mortgage underwriter do?

A mortgage underwriter’s role is to evaluate risk and assess if you’re a suitable candidate for a mortgage loan. They analyze your financial information to determine the likelihood of you defaulting on your mortgage payments.

The underwriter focuses on four key areas in their assessment: credit, assets, income, and the home appraisal. Let’s take a look at what they consider in each area:

  • Credit: Your credit score is a major factor in the mortgage approval process. A high credit score indicates a strong track record of repaying debt and could increase your chances of getting approved for a mortgage. To qualify for a mortgage, you must have a minimum credit score of 620, but to secure the best interest rates, you should aim for a score of 740 or higher.
  • Income: Your lender will want to see evidence of a stable source of income to ensure that you can make your monthly mortgage payments. You can verify your income by providing W-2s, recent bank statements, tax returns, and if self-employed, business tax returns and profit and loss statements.
  • Assets: To mitigate the risk of default, your lender will consider all your assets, which can act as collateral. Relevant assets include checking and savings accounts, retirement accounts, stocks, and investment properties. A substantial number of assets also shows the lender that you have the means to cover your down payment and closing costs.
  • Appraisal: Before finalizing the mortgage, the lender will perform an appraisal of the property to ensure that you’re not overpaying. An appraisal protects both you and the lender by providing a fair assessment of the home’s value.

5 Steps of the Mortgage Underwriting Process

The underwriting process can feel pretty overwhelming when you’re in the beginning stages. Here is an overview of the five steps you’ll need to take to purchase your home.

1. Get preapproved for a mortgage

The first step in the home buying journey is securing preapproval for a mortgage. This crucial step should be taken before starting the search for a house. The preapproval process involves an evaluation of your financial information and a credit check by your lender.

Documents like bank statements, tax returns, pay stubs, and employment history must be submitted to the lender. Upon preapproval, your lender will issue a letter indicating the amount you have been approved to borrow.

Getting preapproved is important as it gives a clear picture of your budget for the home purchase. Additionally, having a preapproval letter enhances the credibility of your offer and makes you a stronger candidate in the eyes of listing agents and sellers.

2. Get your home appraised

With preapproval for your mortgage in hand, it’s time to start your search for your dream home. Once you’ve found it, a home appraisal is the next step.

A professional appraiser will assess the value of the property based on its location, neighborhood, and features, ensuring that you don’t end up borrowing more than the home’s actual worth.

Before purchasing a home, it’s essential to check for any existing claims, unpaid taxes, or liens. After the appraisal of the property, the title company will conduct a thorough search to ensure its clear legal standing.

Upon confirming that the property is free from any legal disputes, the title company will secure a title insurance policy. This insurance provides protection for the lender and verifies the home’s eligibility for purchase.

4. Find out whether you’ve been approved for a mortgage

Once your mortgage loan application has gone through underwriting, you’ll find out if you’ve been approved for a mortgage. Hopefully, your application is approved, and you’ll be all set to close on your home.

However, you could receive one of the following three decisions:

  • Approved with conditions: Your mortgage application may be approved on the condition that you provide additional information. For instance, you may need to provide more financial documents or further proof of employment.
  • Denied: The lender may reject your loan application. If this happens, you want to understand why so you can figure out your next steps. For instance, you might have been turned down because your debt-to-income ratio is too high. Or your credit score may have been too low. Knowing this information gives you tangible steps you can take to improve your finances and reapply in the future.
  • Suspended: Your loan application may get suspended if something is missing from your file. If this happens, the lender will let you know what information they need to continue the underwriting process.

5. Close on your home

Once your lender has cleared any loan contingencies and locked in your interest rate, you’re free to close on your home. Once you’ve closed on the mortgage and received the keys to your new home, the loan process is finished.

How long does the underwriting process take?

There really is no standard time frame to complete the underwriting process; it can take from a few days to a few weeks. The length of time depends on the type of home loan you’re applying for and any issues that arise along the way.

A lot of this will be outside your control, but there are steps you can take to make the experience easier. The best thing you can do is to respond quickly to any requests from your lender.

For instance, if they contact you and request additional bank statements, then try to provide that information as quickly as possible. The mortgage underwriter cannot proceed without this documentation.

How to Ensure a Smooth Underwriting Process

To prepare for the mortgage underwriting process, it’s essential to compile all the required documents and verify the accuracy of your credit report. Additionally, ensure your income and work history are recent and correct and follow these guidelines:

  1. Manage your debt level: Avoid incurring new debt or making significant financial changes that may impact your debt-to-income ratio during the loan processing period.
  2. Stay connected with your lender: Respond promptly to any questions or requests for additional information during the underwriting process. Utilize online resources to stay organized and easily communicate with your mortgage loan officer.
  3. Be transparent about your finances: Provide accurate and complete information about your income, credit history, and assets. If there are any discrepancies, include explanations for them to help the underwriter make a faster decision.

By keeping these tips in mind, you can make the mortgage underwriting process easier and increase your chances of becoming a homeowner.

Bottom Line

During the mortgage underwriting process, your lender assesses your financial information and decides whether you meet the criteria for a loan. For first-time homebuyers, this stage can be overwhelming, but there are steps you can take to simplify the process.

Take the time to carefully compare and choose your lender, opting for one that is willing to support you and provide you with the best terms possible. Additionally, collaborating with a well-informed real estate agent can make the journey smoother.

Don’t be discouraged if your credit score is lower than you’d like. There are many mortgage programs available that are designed to assist borrowers with bad credit. With these options, buying your first home can still be a possibility.

Frequently Asked Questions

What should I do if my mortgage application is denied?

If your mortgage application is denied, it’s essential to understand the reasons behind the decision. Common reasons include a low credit score, high debt-to-income ratio, or insufficient documentation.

Speak with your lender to get specific feedback, and use this information to improve your financial situation. This might involve paying down debt, improving your credit score, or gathering more thorough documentation before reapplying.

Can I switch lenders during the underwriting process?

Yes, you can switch lenders during the underwriting process, but it can be complex and may delay your home purchase. If you’re unhappy with your current lender, it’s important to evaluate the potential benefits and drawbacks of making a switch. Ensure that your new lender offers better terms or service before proceeding.

What happens if the home appraisal comes in lower than the purchase price?

If the home appraisal comes in lower than the purchase price, you have a few options. You can negotiate with the seller to lower the price, pay the difference out of pocket, or challenge the appraisal if you believe it was inaccurate. Another option is to look for a different property that fits within the appraised value.

How can I prepare for a home appraisal?

To prepare for a home appraisal, ensure that the property is clean and well-maintained. Make any necessary repairs and provide the appraiser with a list of recent upgrades or improvements. Additionally, having comparable sales information for similar properties in the area can be helpful.

What is the difference between prequalification and preapproval?

Prequalification is an initial assessment based on self-reported financial information, giving you an estimate of how much you might be able to borrow. Preapproval, on the other hand, involves a more thorough review of your financial situation, including a review of your credit report and verification of income and assets. Preapproval provides a more accurate borrowing amount and carries more weight with sellers.

Can I get a mortgage if I am self-employed?

Yes, self-employed individuals can get a mortgage, but the process may require additional documentation. Lenders typically request at least two years of tax returns, profit and loss statements, and other financial records to verify income stability. It’s crucial to keep detailed and organized financial records to streamline the process.

What is a conditional approval?

A conditional approval means that your mortgage application has been initially approved, but you need to meet specific conditions before final loan approval. These conditions might include providing additional documentation, resolving credit issues, or making repairs to the property. Once you satisfy these conditions, the lender can proceed with finalizing your loan.

Jamie Johnson
Meet the author

Jamie Johnson is a freelance writer who has been featured in publications like InvestorPlace and GOBankingRates. She writes about various personal finance topics including student loans, credit cards, investing, building credit, and more.