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.
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.
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:
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 Type | Type of Borrower | Credit Score | Front-end DTI | Back-end DTI | Hard Limit |
|---|---|---|---|---|---|
| Conventional | Most homebuyers with good credit scores | 680 & above | 28% | 36% – 43% | 50% |
| FHA Loans | Borrowers w/ poor credit scores & limited down payment | 580 – ideal 500 – minimum | 31% | 43% | 57% |
| VA Loans | Veterans, active duty military, & qualified military spouses, down payment not required | Preferably 620 & above | Regards back-end DTI as a more relevant basis | 41% | ~ 47% |
| USDA Loans | Low-income borrowers looking for homes in USDA-approved rural areas, down payment not required | 640 – ideal 620-639, may be approved w/ manual underwriting | 29% | 41% | 41% |
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:
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 AnnualCreditReport.com. 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.
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.
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:
Besides income verification, underwriters evaluate five primary aspects of your finances which include the following:
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.
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.
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:
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.
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:
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:
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.
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.
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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