The Mortgage Underwriting Process Explained in 5 Steps

Mortgage

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 or not 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.

What is Mortgage Underwriting?

Underwriting may sound complicated, but it’s just the process your lender goes through to determine whether or not you qualify for a mortgage. They do this by checking your credit, doing a thorough review of your finances, and assessing the property.

From there, your lender will determine whether or not you are the right candidate for a loan. Most of this happens behind the scenes, but you do have an active role to play in the underwriting process.

It’s your job to supply your lender with all of the financial information they request. By being honest and forthcoming, you make it easier for your lender to decide whether or not to approve your mortgage application.

What Do Mortgage Underwriters Check?

A mortgage underwriter’s job is to assess risk and determine whether you’re a good candidate for a mortgage. They’ll review your financial information and decide how likely you are to default on your mortgage payments.

They do this by assessing four main areas: your credit, your assets, your income, and the home appraisal. Here is an overview of what an underwriter is looking for in each of these areas:

  • Credit: Your credit score is a three-digit number that evaluates whether you have a history of repaying your debt. If your credit score is high, this indicates that you do a good job of repaying your debt and could be a good candidate for a mortgage.

    To qualify for a mortgage, you’ll need to have a credit score of at least 620 or higher. However, the most competitive interest rates are reserved for individuals that score a 740 or higher.

  • Income: Before you can qualify for a mortgage, you’ll need to show your lender that you have a reliable source of income. They want to know that you’ll be able to make your monthly mortgage payments. You can verify your income by providing W-2’s, bank statements, and your tax returns. If you’re self-employed, you’ll need to provide your business tax returns as well as profit and loss statements.
  • Assets: Your lender knows that there is always a chance you could default on your mortgage, which is why they’ll want to consider all of your assets. These assets can be used as collateral if you did default on your mortgage. Relevant assets include things like your savings, retirement accounts, stocks, and investment properties. Having substantial assets also shows the lender that you can afford to cover the closing costs for your home.
  • Appraisal: One you find the home you want to purchase, your lender will perform an assessment of the property. Appraisals protect both you and the lender because it ensures that you aren’t overpaying for your home.

The 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 pre-approved for a mortgage

The very first step in the home buying process is getting pre-approved for a mortgage. You should do this before you even start house hunting. When you get pre-approved for a mortgage, your lender will do an overview of your financial information and run a hard pull on your credit.

You’ll also have to submit quite a bit of documentation to your lender, like bank statements, tax returns, and proof of employment. Once you’ve been pre-approved, your lender will send you a pre-approval letter letting you know how much you qualified to borrow.

It’s important to get pre-approved first because this lets you know what kind of house you can afford to buy. And when you actually start looking at homes, listing agents and sellers will take your offer more seriously if you’ve already been pre-approved.

2. Get your home appraised

Once you’ve been pre-approved for your mortgage, you can start looking at homes. Once you’ve found the home you want to purchase, you’ll need to get it appraised.

During a home appraisal, a professional will determine whether the contract price is appropriate given the location, neighborhood, and features. This ensures that you aren’t borrowing more money than the home is actually worth.

Before you buy a home, you want to make sure there are no claims or outstanding liens on the property. So once the home has been appraised, the title company will perform a search on the property.

Once the title company has ensured that there are no legal claims on the home, the title company will purchase insurance on the title. This insurance protects the lender and ensures the home is available for purchase.

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

Once your mortgage application has gone through underwriting, you’ll find out whether or not 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 mortgage 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 mortgage application may get suspended if something is missing from your file. If this happens, the lender will let you know what information they need in order 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 anywhere from a few days to a few weeks. The length of time depends on the type of mortgage you’re applying for and any issues that come up along the way.

A lot of this will be outside of 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 underwriting process cannot proceed without this documentation.

Don’t Apply for New Credit

And it’s never a good idea to make any sudden financial changes when you’re trying to purchase a home. Don’t open any new credit cards or make any large purchases. You may be anxious to start buying furniture for your new home, but it’s best to wait until the underwriting process is complete.

And make sure you’re as upfront as possible about all of your financial information. Don’t try to hide any details out of embarrassment because your lender will discover the truth.

If you’re honest about previous financial mistakes, your lender might be willing to give you a pass. But that’s far less likely if it seems like you’re trying to hide things.

The Bottom Line

During the underwriting process, your lender reviews your financial information and decides whether you qualify for a mortgage. If this is your first time buying a home, it can feel nerve-wracking, but there are ways you can make the process easier.

Make sure you consider your options carefully before choosing a lender. Look for the lender that is willing to work with you and offer you the most favorable terms possible. Working with a knowledgeable real estate agent can make the process easier as well.

And finally, if your credit score isn’t as high as you would like, there are still many options available to you. There are many mortgage programs available that specialize in helping borrowers with bad credit.

Jamie Johnson
Meet the author

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