The mortgage underwriting process determines whether your finances are strong enough to repay the home loan you’re applying for. And, because anyone’s finances could take a turn for the worse, the underwriting process also evaluates whether the property you want to buy will be valuable enough to repay the loan if the lender has to foreclose. In technical terms, mortgage underwriting evaluates your capacity to repay the loan and the collateral that will secure the loan.
What Is the Mortgage Underwriting Process?
The mortgage underwriting process is all the steps an underwriter goes through to evaluate your borrowing capacity and collateral after you apply for a home loan. These steps include verifying your identity, checking the stability and amount of your income, verifying your employment, reviewing your tax returns, examining your financial statements, checking your credit scores and perusing your credit reports to make sure you can afford the loan.
If everything checks out during underwriting, you’ll be able to close on your mortgage.
Guided by lender, investor and federal requirements, a mortgage underwriter will analyze your finances to make sure you aren’t a risky borrower. They want to see how your income compares to your debt, how steady your employment has been and whether you’re likely to continue earning a similar income for the foreseeable future. They’ll also analyze your application and supporting documents to make sure you’re not committing fraud.
Additionally, mortgage underwriting makes sure lenders follow laws about qualifications for certain loan programs. For example, an underwriter will need to make sure a Veteran’s Administration home loan applicant has met the VA mortgage program’s military service requirements. Or, they might need to make sure a conventional mortgage applicant with a low down payment has a credit score of at least 680 so the loan can be sold to Fannie Mae, one of the government-sponsored entities that helps support the U.S. home mortgage system.
Underwriters must follow objective guidelines in evaluating a prospective borrower’s application. Discrimination in mortgage lending is illegal.
Automated Vs. Manual Underwriting
Automated underwriting uses software to get the ball rolling. With inputs from your loan application, the software can issue a provisional underwriting decision. Lenders who sell the mortgages they originate to Fannie Mae use a program called Desktop Underwriter for automated underwriting. The program for loans sold to Freddie Mac is called Loan Product Advisor.
The software can automatically approve your application, putting you on the fast track to closing. A human underwriter still will verify your application and supporting documentation.
Alternatively, the software can refer your application to manual underwriting, which tends to be a slower process. It means something about your application falls outside the criteria for automatic approval, so the underwriter needs to identify your financial strengths in another area to compensate for that weakness.
Underwriters submit this form when they manually underwrite your loan. You can look at it to get an idea of what they’re required to review.
The underwriting system can also issue a result in between an automated approval and a referral to manual underwriting. In these cases, a small tweak to your application, such as paying down a credit card balance, could be enough to resubmit your application and get an automated underwriting approval.
What the Mortgage Underwriter Evaluates
The mortgage underwriter evaluates every aspect of your finances that lenders want to know about to decide whether you’re an acceptable credit risk. Basically, the underwriter needs to prove to the lender that you’re likely to repay the loan. That means they’ll be looking at these factors:
- Income. Do you have a history of steady income that’s likely to continue? Is it enough to pay for the mortgage you’re applying for, along with property taxes, insurance and homeowners association fees?
- Assets. Do you have the cash needed to close? Will you have enough cash reserves left after closing to weather any disruptions to your income or expenses?
- Credit. Is your credit score good enough to qualify for the loan? Are there derogatory items on your credit report? How serious and how recent are they?
- Debts and other liabilities. What are your total monthly debt payments? What will your front-end and back-end debt ratios look like if you’re approved for this mortgage? Are you obligated to pay child support or alimony?
- Collateral. Does the home appraise for at least as much as the contract price?
Potential Underwriting Outcomes
The result of the underwriter’s evaluation will either be a conditional approval, suspension or denial.
- Conditional or contingent approval means you need to submit more documents to answer the underwriter’s questions, but as long as those documents check out, you’ll be cleared to close. Common requests include verifying the source of a large deposit to prove that it’s not a loan or verifying the source of a gifted down payment with a gift letter from the donor.
- Suspension means there’s a more significant question about your file. Your loan officer will work with you to resolve the underwriter’s questions.
- Denial means what it sounds like. Even if you were pre-approved, a thorough review of your finances by underwriting can mean that your loan is ultimately denied.
How Getting a Mortgage Works
Step by step from application through loan funding, here’s how the process of getting a mortgage works.
- Apply for a mortgage.
- Get pre-approved.
- Find a home and sign a purchase agreement, if you haven’t already.
- Submit the purchase agreement to your loan officer.
- Review your loan estimate to make sure you want to proceed.
- Submit your underwriting paperwork to your loan officer.
- Wait for the underwriter to review your application.
- Respond to any requests for additional information from the underwriter.
- Get approved to close on your mortgage.
- Sign closing paperwork.
- Wait for your loan to get funded.
How Long the Underwriting Process Takes
According to the Homebuying Institute, an independent educational website for homebuyers, five to eight business days is a reasonable timeline for the mortgage underwriting process.
Some tech-forward mortgage lenders are differentiating themselves from their competitors by offering even faster underwriting. For example, Movement Mortgage says it can provide underwriting results within six hours of receiving an application.
But the process also can take much longer than average. Every borrower’s circumstances are unique.
Several factors affect how long the mortgage underwriting process takes:
- The lender’s application volume and staffing levels
- The loan officer’s competence
- The lender’s underwriting process
- The underwriter’s experience
- The type of loan you’re applying for
- How quickly you respond to the underwriter’s requests for documentation
- How complex your finances are
- The results of the home appraisal
The time it takes to close your loan includes the entire process from start to finish. The average time from application to closing was 45 days over the 12 months ending with August 2020, according to mortgage technology provider Ellie Mae. Underwriting is just one part of that process.