Requirements for Mortgage Approval: Key Steps in the Mortgage Underwriting Process

The Fundamentals of the Mortgage Underwriting Approval Process

For most people, taking a mortgage is a crucial step in financing a home purchase. Besides saving a hefty down payment, you must improve your credit score and get your finances in order. Before your loan is granted, lenders scrutinize your income and credit history to make sure you can pay back your loan. This process is known as mortgage underwriting, which has a significant impact on the approval of your loan application.

Our guide will walk you through the underwriting process, including what to expect and requirements you need to prepare. We’ll explain the significance of each underwriting step, along with three possible outcomes you might receive from a lender. Your application may be approved, suspended, or denied. Finally, we’ll provide practical advice for a smoother, more efficient underwriting experience.

Understanding Mortgage Underwriting

Buyer, Real Estate Agent, Money and Document.

Once a loan processor compiles your mortgage application, it’s forwarded to the underwriter. A mortgage underwriter is a financial professional that evaluates your finances based on verified documents and information you provide. They assess your creditworthiness, which is your ability to repay a loan. Generally, most lenders follow underwriting standards implemented by Fannie Mae and Freddie Mac.

Underwriters assist lenders in deciding whether or not you’re a viable candidate for a mortgage. They gauge how much risk you impose on lenders based on factors such as your income, debt-to-income ratio, and credit history. They also work with you to secure all necessary financial documents, making sure they are accurate and complete. At the end of the day, the underwriter’s task is to ensure you’re granted a mortgage you can afford.

Automated Underwriting vs. Manual Underwriting

Automated underwriting is typically faster than manual underwriting. It uses a computer algorithm to review and render a decision based on financial information. Manual underwriting, meanwhile, is done by an actual person who analyzes your finances. Lenders may use a combination of both automated and manual processes to measure a borrower’s risk level.

Automated underwriting comes with limitations. If there’s additional paperwork to be assessed, a person still needs to take over the process. In this respect, the automated option is not ideal for applicants with unique financial situations, such as irregular income, or lower than average credit scores. Ultimately, the underwriter, with approval from the lender, will make the final call.

The Underwriter’s Task

During the process, the underwriter verifies your income, employment, credit history, and your debt-to-income ratio. They must also check your down payment and if you have enough savings (cash reserves) to cover monthly payments in case of emergencies. They are also in charge of arranging the property’s appraisal. Here’s a list of tasks to expect from an underwriter:

  • Validate your income and employment: You must provide proof of your salary and job by submitting an employment confirmation letter from your company. They will also ask for pay stubs and W-2 forms. Your underwriter may call your employer for verification. They check into your past employment records, particularly if you’ve been with an employer for less than two years.
  • Verify your down payment and savings: Depending on your lender and your financial background, some lenders may require 5% down, while others may ask for at least 10%. But note that gathering a large down payment helps you secure a loan with a more favorable rate. This lowers your loan-to-value ratio (LTV), which measures the loan amount you owe versus the property’s market value. Making a higher down payment decreases your LTV ratio, which imposes lower risk on a lender. A lower loan amount likewise decreases your monthly payments. Moreover, making a 20% down payment lets you avoid private mortgage insurance (PMI), which costs around 0.25% to 2% of your loan amount per year. PMI is only automatically canceled once your LTV ratio reaches 78%.
  • Arrange the property appraisal: Your underwriter is in charge of ordering an appraisal on the home. This ensures the amount the lender is offering matches with the property’s actual market value. The lender will feel more secure knowing that the home has maintained the estimated value. This verifies they are not offering an amount that’s too high for your mortgage.
  • Checks your debt-to-income ratio (DTI): DTI ratio is a percentage that measures your monthly debt payments compared to your gross monthly income. It basically tells lenders how much you spend versus how much income you actually earn. A higher DTI ratio suggests you’re overleveraged. This means you’re not in a good financial situation to take on more debt. Meanwhile, a low DTI ratio indicates you have ample income to make consistent monthly mortgage payments. A lower DTI ratio also makes you qualify for more favorable mortgage rates. DTI ratio requirements vary depending on the type of loan you get.

2 Main DTI Ratios

  • Front-end DTI Ratio: This percentage compares your housing-related expenses with your gross monthly income. It includes monthly mortgage payments, mortgage insurance, homeowner’s association fees, real estate taxes, etc. Most conventional lenders require a front-end DTI ratio of 28% and below.
  • Back-end DTI Ratio: This percentage includes your housing-related expenses together with other debt obligations. It includes payments for your car loan, credit card debt, student debt, etc. Conventional lenders generally require a back-end DTI ratio of 36% and below. Depending on your lender, the strength of your credit background, and your down payment, the back-end DTI can be stretched to 43%. In some cases, even up to 50%.

The following table shows credit score and DTI requirements for different types of mortgages. This includes the maximum back-end DTI limits. Note that lenders consider other factors on your loan application for approval. Government-backed mortgages, such as those sponsored by the U.S. Federal Housing Administration, U.S. Department of Veterans Affairs, and the U.S. Department of Agriculture usually have more lenient standards than common conventional conforming loans.

Mortgage TypeType of BorrowerCredit ScoreFront-end DTIBack-end DTIHard Limit
ConventionalMost homebuyers with good credit scores680 & above28%36% – 43%50%
FHA LoansBorrowers w/ poor credit scores & limited down payment580 – ideal
500 – minimum
VA LoansVeterans, active duty military, & qualified military spouses, down payment not requiredPreferably 620 & aboveRegards back-end DTI as a more relevant basis41%~ 47%
USDA LoansLow-income borrowers looking for homes in USDA-approved rural areas, down payment not required640 – ideal
620-639, may be approved w/ manual underwriting

Underwriters compare different financial aspects of your loan application. They weigh them against each other and see if other financial factors may compensate for another. Overall, their assessment shows whether or not you have an acceptable risk level for approval. For instance, let’s use Fannie Mae’s underwriting standards:

  • Credit score of 680 or above
  • Maximum back-end DTI ratio of 36%
  • Maximum LTV ratio of 95% (5% down payment)

Based on these guidelines, if you fall short of one criteria, your mortgage may still be approved based on the strength of other financial factors. For example, if your DTI ratio is around 39%, you might still be approved as long as you have a higher credit score. In other cases, if your credit score is lower than 680, you might be approved by making a higher down payment to reduce your loan-to-value ratio.

Review Your Credit Report

Before applying for a mortgage or any kind of loan, be sure to check your credit report. Borrowers are entitled to a free copy every 12 months. You can request one at Besides getting a better sense of your financial profile, it allows you to review your credit history and pinpoint aspects you can improve.

It’s important to always pay bills on time. Any missed or late payments will impact your credit score negatively. You must also keep your credit card balances low. Large debts will drag down your credit rating. Moreover, check your credit report for any errors such as the wrong name, address, or incorrectly recorded payment. Disputing errors on your credit report will help improve your credit score.

Given the requirements, it’s best to improve your credit score and other financial factors before applying for a mortgage. Generally, lenders are stricter today than in the past, especially after the 2008 subprime mortgage crisis. They are more careful about extending credit to make sure borrowers can afford the loan. If you don’t get approved the first time, it means you just need a bit more time to improve your financial standing. In other cases, choosing a certain type of mortgage product, such as a government-backed loan, can help you obtain a mortgage based on your current financial profile.

Compare Your San Diego Mortgate Options Today

If you find it challenging to qualify for a conventional loan, consider looking into government-backed mortgages. These loans usually offer more lenient credit standards. Overall, focus on improving mortgage qualification factors to secure a good mortgage deal. The following table shows local mortgage rates so you can figure your budget and estimate what your monthly loan payments will be for various scenarios. There is a toggle switch to turn on VA and FHA loans so you can compare them to conventional loans.

Get Prequalification & Preapproval

Prior to submitting a mortgage application, it’s important to know how much home you can afford. Thus, be sure to obtain mortgage prequalification and preapproval from a lender. Though both processes may be similar, they offer very different advantages.

  • Prequalification is an informal assessment of your financial background. It’s based on unverified financial information, and does not incur any hard inquiry on your credit record. It gives you a ballpark estimate of how much loan you might qualify for. It also gives you a basic idea of what aspects to improve on your finances.
  • Preapproval, on the other hand, is based on verified financial information. It means your employment and credit background has been thoroughly assessed by a lender. It also puts a hard inquiry on your credit record. You can get preapproval done without having to sign a purchase contract. A preapproval letter includes a specific amount a lender is willing to offer. This allows you to start shopping for homes within a price range. Securing preapproval is also a sign that you’re a serious homebuyer.

Key Steps in the Mortgage Underwriting Process

Homebuyers submitting documents to lender.

The mortgage underwriting process involves submitting extensive financial information to your lender. This includes W-2 forms, bank statements, pay stubs, tax returns, and other sources of income to complete your application. If you are self-employed, they usually ask for additional documentation. This includes K-1 forms, profit and loss sheets, balance sheets, and personal and business tax returns. All these details are requested so lenders can assess if you can cover monthly mortgage payments.

Take note of the following steps in the underwriting process:

Financial Background Review

Besides income verification, underwriters evaluate five primary aspects of your finances which include the following:

  • Character – Checks whether you have a stable work history. If you run a business, it reviews how stable and profitable your business is.
  • Capacity – Evaluates how much loan you can afford based on verified financial information.
  • Credit History – Reviews how you’ve managed repaying past and current credit.
  • Collateral – Verifies if the property’s market value supports the mortgage.
  • Conditions – Considers the current and long-term stability of the economy and the job market.


When you purchase a house, appraisals are almost always mandatory. This protects both buyer and lender, making sure you only borrow what the property is actually worth. The value of a home is based on different factors such as the age and size of the property. It also considers current sales of comparable houses in the location.

A professional appraiser inspects the property by taking photos and measurements. They assess the condition and features during a scheduled walk-through. When they compare the property with other similar homes, the comparison must be made with houses sold in the last 6 months. These comparable homes must also be within one mile of your property, unless you live in a low population rural area.

Once the house has been appraised, the underwriter compares its market value to your loan amount. If the amount of your mortgage is in line with the property’s value, the application is good to go. On the other hand, if the property is worth a lot less than your mortgage, your application will likely be suspended. When this happens, you can negotiate with the seller to reduce the home’s price. You may also contest the results of the appraisal. If you’re not happy with your seller’s response, you can look for another property instead.

Title Search and Title Insurance

Before finalizing the sale, the buyer and lender must be certain the property does not have existing legal claims. The house must be free of any liens, including unpaid taxes and judgments. To verify it does not have any issues, a title company conducts a thorough title search on the house. Title insurance protects you and the lender in case there are ongoing liens on the property.

Title searches generally take around 10 to 14 days to complete. The time it takes depends on the availability of the documents and how many files must be reviewed. The age and transaction history of the home also affects the processing time. It can take longer if the house is old and the documents are not found in a digitized system. Costs for title searches vary per state, and typically range from $75 to $200. This is usually included in your mortgage’s closing costs, which is 3% to 6% of your loan amount.

The Decision

Once underwriting is completed, the result everyone counts on is mortgage approval. This provides you with a go signal to proceed to the closing process. But generally, lenders may issue one of three decisions on your application: Approved, Suspended, or Denied. Here’s what each decision means:

3 Possible Underwriting Decisions

  • Approved with Conditions: The status of majority of loan applications is often “conditional approval” or “approved with conditions.” In this scenario, your underwriter may simply need clarification and additional documents to proceed to closing. This may include extra documents such as tax forms, a copy of your business license, marriage certificate, divorce decree, etc. The underwriter may also ask about late payments or a large balance. Fulfilling the conditions ensure the application meets standards needed to close the deal.
  • Suspended: Receiving a suspension is not entirely unusual for a mortgage application. This means there are delays in processing your financial documents. If your underwriter cannot verify your employment or income, you must submit the required information. When this happens, your lender should inform you how to clear the suspension by submitting the necessary paperwork.
  • Denied: If your application is denied, you must find out and understand why. For instance, you may have too much debt according to your lender’s standards. If so, you might be able to reduce your DTI ratio by paying down a large credit card balance. If your credit score is too low, you should give yourself time to improve it by never missing bills and settling large debts.

Getting denied on an application is not the end for a homebuyer. Denials help you rethink the loan product you chose and the size of your down payment. You can try to get a smaller loan amount, or gather a much larger down payment. Sometimes, you might have to dispute an error on your credit report to improve your score. You may apply again after a couple of months or a year when you’re credit rating is higher.

On the other hand, once you receive approval, your homebuying is almost complete. The final step in the process is closing, which is when the lender finances your loan by paying the seller in exchange for the property’s title. On closing day, you’ll be asked to review and sign the final agreement. You must also pay the required closing costs before receiving the keys to your new house.

How Long Does the Underwriting Process Take?

Under normal circumstances when you’re eligible for approval, your mortgage application should be underwritten within 72 hours of your submission. It can also take one week after you have completed all the necessary documents to your loan offer. If you can get appraisal and title search completed as soon as possible, it will speed up the process. However, it can take as long as a month or so if you have pending documentation.

Underwriting can take a few days to a few weeks. Borrowers have different credit situations, and this can affect the processing time. Incomplete applications can slow down the process, so make sure to gather all the required paperwork as early as you can. During this period, note that your underwriter might come back to you for follow up questions. Answering these questions as soon as you can helps speed up the process.

Underwriting is just one aspect of the homebuying process. It typically takes around 40 to 50 days to close a mortgage from the time the application is approved.

How Your Lender Affects the Processing Time

The time frame also depends on your chosen lender. If you choose a large bank, your application is typically forwarded to a centralized location (usually not near you) that processes your documents. Big banks usually prioritize handling as many files as they can, which means it can take longer to process your application.

Meanwhile, smaller lenders and those working with an independent mortgage broker are usually faster. Smaller banks tend to staff more coordinated in-house teams. This tends to result in more efficient underwriting operations in one area.

However, there are good reasons why people prefer to transact with larger banks. Major lending institutions can generally afford to take more risks than smaller banks. This is favorable if you happen to have a few credit issues that need review for approval. Big banks also offer a wider variety of mortgage products that might suit your unique financing needs. But as a tradeoff, you exchange faster processing and efficiency for the chance to secure a good deal.

Advice for a Smooth Underwriting Experience

Happy underwriter with complete loan requirement.

For the most part, lenders take care of underwriting for you. But there are many things you can do to make the experience smoother and more efficient. Here are several tips you should follow for a better underwriting process:

1. Prepare and Organize All Required Documents

Preparing your mortgage requirements early is the best way to keep your application on track. Make sure to request paperwork from your bank and employer as soon as you can. If you have pending documents, send them as quickly as possible. You should also respond to questions from your underwriter in a timely manner.

If you intend to use gift money as down payment, you should have the funds in your account before the application. You must also provide a letter that proves the money is a gift that does not necessitate repayment.

Before you file your application, gather a folder of the following documents:

  • W-2 forms from the last 2 years
  • Pay stubs from the last 1 or 2 months
  • Employment info. from the last 2 years
  • Account info.: Savings accounts, checking accounts, retirement accounts, etc.
  • If you’re self-employed: Includes business records and tax returns in last 2 years
  • Additional income info.: Bonuses, overtime payments, commissions, dividends, pension, Social Security, alimony or child support

2. Improve Your Credit Rating

As previously mentioned, make it a point to improve your credit score before taking a loan. A low credit score, large debts, or any unsettled accounts reduces your chances of approval. Pay off debt and keep your credit utilization ratio under 30%. Credit utilization ratio is the amount of revolving credit you’re using compared to the total amount of revolving credit available to you. Keeping it low will be a good sign for lenders. Finally, improving your credit score makes you eligible for better deals with more favorable rates.

  • Pay your bills on time: Any late payments will reflect negatively on your credit score. Make it a habit to make timely payments. Remember, your credit report is based on 35% of your credit report, which is the largest factor that impacts your credit score. A good track record goes a long way.
  • Avoid applying for new credit: Opening new credit accounts is not a good move before applying for a mortgage. A new credit account shortens the average age of your accounts, which lowers your credit score. While having a diverse set of accounts is important, this should only be achieved over a longer time period.
  • Do not make large credit card purchases: Making expensive purchases will certainly reflect in your credit record. This increases your debt-to-income ratio, which might hinder your chances of loan approval. Lenders can also pull your credit and recheck your finances at any time before closing.
  • Do not close your old accounts: Closing an old credit account actually lowers you credit score. This is because your debt is spread between fewer accounts. It indicates you are using more of your credit line, which is a red flag for lenders. Moreover, closed accounts will keep showing up on your credit report anyway, which is still included by credit bureaus.

3. Save for a Larger Down Payment

Borrowers who offer a large down payment, specifically 20%, are more attractive candidates to lenders. A higher down payment significantly decreases your LTV ratio. This reduces overall credit risk for the lender, and is also beneficial to the borrower. As mentioned previously, paying 20% down bypasses private mortgage insurance (PMI) for conventional mortgages, which helps borrowers save on their loan.

Before buying a house, give yourself enough time to gather down payment. You can render overtime work to increase your savings, or get a part-time job. If you can, ask family members who are willing to shoulder a portion of your funds. A higher down payment increases your chances of securing a mortgage, even if your credit score might be a little low.

In Conclusion

Getting keys to a new home.

Mortgage underwriting is simply the process of verifying and evaluating your income, debts, financial records, and property details before approving your application. Underwriters assess the level of risk you might pose according to the lender’s standards. If your results show acceptable credit risk, your mortgage is approved and you can proceed to closing and finalizing the agreement.

Throughout the entire process, be honest and upfront about your finances. More often, your underwriter will know if you’re hiding any important information from your lender. To make the process smoother, talk to your underwriter and include explanations on certain details that might need clarification. These things include missed payments, sudden large emergency expenses, or car repair costs close to your credit card’s payment date.

Finally, always actively respond to your underwriter’s questions and requests. The sooner you clarify information or submit documents, the faster your application will be processed. And even before you apply for a mortgage, it’s important to check your credit report and improve your credit score. In the long run, it will help you secure a more favorable mortgage deal with a competitive rate.

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