Mortgage underwriting process — how does it work?

For many people, the mortgage underwriting process is one of the most confusing parts of home buying. However, it's important to understand what underwriting is, how it works, and why it's a crucial step of home loan approval. Armed with this knowledge, you should be much better prepared to go into the mortgage process and to come out with a positive result.

What is mortgage underwriting?

At its core, mortgage underwriting is a crucial step in the lender's decision-making process of whether you'll receive final approval for a home loan. During this process, underwriters will take the time to verify your financial documentation in order to weigh the risk of lending to you. After review, if the mortgage underwriter feels that you are capable of making your mortgage payment each month, they will issue final approval and you can move forward with buying the home.

Truthfully, this process can take anywhere from a few days to a few weeks, depending on how soon the underwriter receives all of your financial documents and on how many other mortgage applications are being processed at the time.

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What factors does a mortgage underwriter review?

The vast majority of what underwriters do is reviewal and verification of your financials in order to make sure you are willing and capable of paying back your mortgage loan.

With that in mind, there are several factors that a mortgage underwriter will weigh when making their decision:

1. Credit report
2. Debt-to-income ratio
3. Down payment and assets
4. Home appraisal
5. Income and employment

1. Credit report

One of the first things that the underwriter will review is your credit report and, specifically, your credit score. Each loan program has different minimum credit score requirements that must be met so the underwriter will make sure that your score is high enough to be approved. In addition, they will likely look for any red flags, such as a poor payment history, which could indicate that you are more likely to default on the loan.

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2. Debt-to-income ratio (DTI)

Your debt-to-income ratio will also be listed on your credit report. A DTI ratio is simply a measure of your current income versus any existing debts. It's used as an indicator of whether or not you can afford to take on more debt in the form of a mortgage and, usually, should be no more than 45%.

3. Down payment and assets

Next, the underwriter will look at recent statements for many assets like bank accounts or retirement accounts. Here, the mortgage underwriter is looking to see that you have a sufficient amount of funds to make your down payment, as well as a little bit extra in cash reserves so that you will be able to continue to make your mortgage payment even if your income falls through.

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4. Home appraisal

Typically, mortgage lenders will also require that an appraisal is done to verify the market value of the property that you are purchasing. This is done in order to ensure that the property is worth the loan amount. If it is determined that the property is worth less than the loan amount that you're being given, you may need to renegotiate the purchase price with the seller.

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5. Income and employment

Finally, the underwriter will usually call your employer to verify your employment history and to do an income analysis. While this may sound complicated, it's just an extra check that you make enough money to afford your mortgage payments.

5 steps to getting a mortgage approved

Now that you know what underwriters will look for when evaluating your loan application, it's important to go over the steps to getting a mortgage approved.

1. Shop around for a pre-approval
2. Fill out a loan application and collect documents
3. Go through the underwriting process
4. Receive conditional approval
5. Get a final determination

Take a moment to look them over so that you have a better understanding of where underwriting falls in the process.

1. Shop around for a pre-approval

The first step in getting a mortgage is to compare rates and lenders in order to find the right lender to pre-approve you for a loan. A mortgage pre-approval is a letter from the lender that specifies how much they are willing to lend you based on an initial overview of your finances. This letter is usually submitted alongside an offer in order to prove to the seller that you are financially capable of buying the home.

2. Fill out a loan application and collect documents

Once you've submitted an offer and it's been accepted, it will be officially time to fill out your loan application. After filling out the application you will work with a loan servicer to create a file of financial documentation to give to the underwriter.

3. Go through the underwriting process

After your file is complete, it will be sent to the underwriter for review. This is where the underwriter takes the time to verify all of your documentation and the information that you put down on your loan application.

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4. Receive conditional approval

You’ll likely receive what's known as a “conditional loan approval” before you receive your final determination. Conditional approval means that you'll likely be approved for a loan, however, the underwriter needs some additional or updated information before the loan is processed. As long as you can provide the additional information and it's deemed satisfactory, you should be able to move forward with closing on the loan.

5. Get a final determination

Once the underwriter has all the information they need, they will issue their final determination. In this case, you will either be approved, denied, or suspended. When a loan application is “suspended,” it means that there is an issue that is preventing the underwriter from making a determination on your loan application.

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