If you’re on your way to homeownership, there’s a hurdle between preapproval and the official approval of your home loan: mortgage underwriting.
Lenders use the underwriting process to put your assets and liabilities under the microscope so they know how likely you are to repay the debt that your potential home will secure. Being ready with the requisite paperwork, from financial records to employment details, can speed your application along. If something’s amiss, your lender’s mortgage underwriter will work with you to complete your application and close your loan on schedule.
While mortgage underwriting can vary depending on your situation and lender, here’s the gist of what you can expect. Plus, we’ll review how to overcome common problems that could arise during underwriting — and how to solve them.
What is mortgage underwriting?
Mortgage underwriting refers to the process of a lender assessing the likelihood that you’ll be able and willing to repay your requested home loan amount. They review various details, including your credit scores, credit history, income, current employment situation, employment history, assets and outstanding debt.
And when you’re seeking a loan directly or indirectly backed by the government — via the Department of Housing and Urban Development (HUD), Fannie Mae or Freddie Mac, to name a few examples — the mortgage underwriting process involves meeting the criteria of both the lender and the third party.
Here’s a closer look at the main factors lenders and mortgage program providers review when underwriting a mortgage.
| Mortgage underwriting criteria | Detail |
|---|---|
Credit score | You must meet minimum credit score requirements. For example, HUD requires minimum scores of 500 for FHA loans, while Fannie Mae requires minimum scores of 620 for fixed-rate conventional loans. |
Credit history | Your credit reports demonstrate your reliability (or riskiness) as a borrower. Certain records — such as previous short sales, foreclosures and bankruptcies — can lead to loan denials or higher interest rates. For example, Fannie Mae requires you to wait four years after a bankruptcy discharge or dismissal and seven years after a foreclosure before you can get a mortgage. |
Debt-to-income (DTI) ratio | Your DTI shows the percentage of your gross monthly income that you spend on debt payments. You may be required to have a DTI under a certain percentage. For example, HUD generally requires a DTI ratio of 43% or less (where your monthly debt obligations include the proposed mortgage payment). |
Employment and income | Lenders require proof of stable income, like being employed for the past two years. They may also require your current employer to confirm that they expect your employment to continue. |
Assets | Lenders want to confirm you have the financial capability to make a down payment and cover the potential mortgage’s closing costs. Generally, the higher your net worth, the less risk you present. That’s why they’ll also consider your investment and retirement accounts, owned vehicles and other properties. |
How long does the underwriting process take?
Mortgage underwriting can be completed within a few business days. However, if there are any issues, it could take weeks. But remember that mortgage underwriting isn’t the only step in the closing of your home loan.
Many of the best mortgage lenders can close a loan in 30 to 45 days, though some mortgage companies offer faster closing periods. New American Funding advertises a 14-day closing guarantee, for example, while Northpointe Bank promises to close its SimpleLoan in 15 days or less.
The role of a mortgage underwriter
After you have an offer on a property accepted, your potential lender assigns a mortgage underwriter to order an appraisal and begin reviewing and verifying your information. The underwriter will examine your finances, employment, net worth, credit history and more to determine whether you qualify for a home loan — and at what interest rate.
If the underwriter has any questions — perhaps they need a more recent bank statement or pay stub — they’ll contact you directly. (Your response time is directly tied to the loan closing on schedule, so reply as promptly as possible to keep things moving.) Upon full loan approval, you’ll be cleared to close on your new home.
The mortgage underwriting process — and how to prepare
While the process can vary between lenders, here are the common steps you can expect and how to prepare for each.
1. Credit check
Mortgage underwriters check your credit reports from one or more of the consumer credit bureaus: Equifax, Experian and TransUnion. They’ll also check your credit scores.
How to prepare:
- Unfreeze your credit reports (if you previously froze them).
- Don’t apply for any new credit (besides the mortgage).
- Check your credit reports to ensure all information is accurate.
- Dispute any errors with the reporting credit bureaus and get them removed.
- Pay down any revolving credit lines with high balances, if possible.
- Try to improve your credit scores through the free-of-charge “Experian Boost”.
- Make all existing debt payments on time.
2. Debt review
Underwriters also request information about all of your debts so they can calculate your DTI. Your debt accounts might include credit cards, a car or personal loan, another mortgage, student loans and payment plans with debt collectors.
How to prepare:
- Make a list of all of your debts.
- Download the most recent statement from each account.
- Note your outstanding balance, monthly payment amount and remaining term, if applicable.
- Make sure that all credit accounts are in good standing, and pay the outstanding balance on any delinquent accounts to bring them current.
3. Income audit
You’ll also need to report all sources of income, such as earnings from employment, side gigs, investments, alimony or child support, commissions, bonuses, dividends and overtime.
What you need:
- Proof of employment income, such as the last two years of tax returns or W-2s, two most recent bank statements and two most recent pay stubs.
- Proof of business income, like profit and loss sheets and signed tax returns from the past two years, plus bank statements from the past two to three months.
- Proof of alimony or child support, including copies of checks and bank statements.
- Statements from any other accounts that generate income.
4. Employment verification
Underwriters scrutinize your record of employment over the past two years. This way, they can confirm you have a sufficiently stable income to source your potential mortgage payments.
What you need:
- Proof of employment from the past two years (see documents above).
- Employer contact information; if you work at a larger company, ask your human resources department for the proper point of contact.
5. Net worth assessment
Underwriters calculate your net worth to determine how much of a cushion you might have if your income suddenly became unpredictable. That’s why they’ll put a spotlight on your checking, savings, retirement and investment account balances, life insurance cash value balances and vehicles.
How to prepare:
- Make a list of your assets and their values.
- Collect proof of your assets (like bank account statements, retirement fund statements, life insurance policy statements and copies of vehicle titles).
6. Home appraisal
Your lender will also hire a real estate appraiser to determine the market value of the home you want to buy. (The home serves as collateral for the loan, so its value must justify the loan amount.) The cost of an appraisal averages $500, according to the National Association of Realtors, and is usually paid by the buyer as part of the closing costs.
How to prepare:
- The lender will handle the appraisal, but work with your realtor to receive a copy of the results (and appeal them, if necessary).
- You can also perform research on comparable properties in your area (using property search engines like Zillow and Trulia) to determine if the sale price is fair.
7. Closing
If your mortgage application is officially approved, the underwriter will finalize the terms and conditions of the loan, such as your final borrowed amount, repayment term, interest rate and closing costs. If the lender’s formal offer looks good, you can accept it and move forward with your home purchase.
Potential issues and solutions during home loan underwriting
If problems arise during the underwriting process, they can delay or derail your path to closing. For example, if you claim to make $8,000 per month but your pay stubs only show $7,000, the underwriter may have some questions. Below are common problems and how to solve them.
| Common problem | Solution |
|---|---|
You’re taking on too much debt | If your DTI exceeds a lender’s limits, you’ll need to reduce your monthly debt payments or increase your gross monthly income. For example, if you only have a few payments left on your auto loan, you could pay off the balance to eliminate the monthly payment. You could also pick up a side gig to increase your monthly income. |
Your income is variable (perhaps you’re a freelancer or business owner) | You’ll need to provide two years of income history, and it helps if your recent income is stable or trending upward. It may also help to apply with a lender that does manual underwriting. |
You lose your employment | Disclose the situation to your lender. Stable employment is a key eligibility requirement, unless there are compensating factors. |
You apply for other credit while your application is under review | When you apply for new credit and allow hard credit inquiries, it hurts your credit scores. If you’ve already applied for any credit aside from the mortgage, the damage is done, but don’t apply for more. Additionally, if you haven’t opened a new credit account, don’t. It’ll negatively affect your DTI ratio. |
Your credit could use improvement | If your credit scores are fair to bad, you may receive loan denials or high interest rates. Improve your scores by making on-time payments and keeping the balances on your revolving credit lines low. |
Your credit is frozen | Contact the credit bureaus and request to temporarily lift the freezes. Don’t reset them until the underwriter confirms they have what they need. |
Your down payment is small | The lower your down payment, the larger the loan you’ll need. If the underwriter determines you can’t borrow the amount you need to cover the house’s sale price, you can make up the difference by increasing your down payment. If you don’t have the funds available, you can look into homebuyer grants or see if a friend or family member will gift you the remaining amount. |
You have missing documents | Respond to your underwriter quickly. That will increase the odds your loan closes on time. |
You stretch the truth on your finances | Being upfront with your mortgage underwriter helps the process move along. Plus, you’ll have to document (or back up) what you say, so there’s no point in embellishing your financial resume. |
Expert tip: “If you have a credit score below 620, unusual income patterns or a one-time event that affects your credit, like a job loss or divorce, an automated underwriting system can turn you down when you may deserve to be approved for a home loan,” said Adam Spigelman, an executive at mortgage-banking firm Planet Home Lending.
In those situations, Spigelman added, it can help to find a lender (such as a credit union or community bank) that does manual underwriting so an actual person will review your application. They can then make the case for you to get a home loan when the algorithm of an automated underwriting system can’t.
Frequently asked questions (FAQs)
The objective is to assess whether borrowers are likely to repay the mortgages they request. Through underwriting, lenders decide which borrowers can get loans and how much to charge them.
Lenders employ mortgage underwriters. Additionally, many have adopted automated underwriting systems that can assist human underwriters or even approve loans without needing a manual review.
Credit scores are one of the main factors underwriters consider during the underwriting process. Though it’s possible to buy a house with bad credit, lenders associate lower scores with higher risk, which leads to higher interest rates or loan denials. On the other hand, higher credit scores represent less risk and result in lower interest rates and a greater chance of approval.
If you don’t think a lender’s mortgage underwriting decision is fair (or based on incomplete or inaccurate information), contact the company and ask for an explanation. You may be able to clear up a misunderstanding so they can reconsider your application or pursue a formal appeal. You can also apply for a different loan program with the same lender or shop around with other lenders.
Mortgage underwriting is an important step in the home loan approval process. It involves a lender assessing the likelihood that a borrower will be able and willing to repay the requested home loan amount. During underwriting, various details are reviewed, including credit scores, credit history, income, employment situation, assets, and outstanding debt. The underwriting process can vary depending on the borrower's situation and the lender's requirements. It is important for borrowers to be prepared with the necessary paperwork and to address any potential issues that may arise during underwriting.
Here is a breakdown of the main factors that lenders and mortgage program providers review during the underwriting process:
Credit Score
- Minimum credit score requirements must be met. For example, the Department of Housing and Urban Development (HUD) requires minimum scores of 500 for FHA loans, while Fannie Mae requires minimum scores of 620 for fixed-rate conventional loans.
- Credit scores also determine the quoted interest rate upon approval.
Credit History
- Credit reports are reviewed to assess the borrower's reliability as a borrower.
- Certain records, such as previous short sales, foreclosures, and bankruptcies, can lead to loan denials or higher interest rates.
- For example, Fannie Mae requires borrowers to wait four years after a bankruptcy discharge or dismissal and seven years after a foreclosure before they can get a mortgage.
Debt-to-Income (DTI) Ratio
- The DTI ratio shows the percentage of the borrower's gross monthly income that is spent on debt payments.
- Lenders may require a DTI ratio under a certain percentage. For example, HUD generally requires a DTI ratio of 43% or less, where the monthly debt obligations include the proposed mortgage payment.
Employment and Income
- Lenders require proof of stable income, such as being employed for the past two years.
- Current employers may be contacted to confirm the expectation of continued employment.
Assets
- Lenders want to confirm that borrowers have the financial capability to make a down payment and cover the potential mortgage's closing costs.
- Net worth is considered, including investment and retirement accounts, owned vehicles, and other properties.
The duration of the underwriting process can vary. While it can be completed within a few business days, it may take longer if there are any issues. However, it's important to note that underwriting is not the only step in the closing of a home loan. Many mortgage lenders can close a loan in 30 to 45 days, with some offering faster closing periods.
During the underwriting process, if any problems arise, they can delay or derail the path to closing. Common issues include taking on too much debt, having variable income, losing employment, applying for other credit while the application is under review, needing credit improvement, having frozen credit, having a small down payment, or having missing documents. It is important to address these issues promptly and work with the lender to find solutions.
If borrowers believe that a lender's mortgage underwriting decision is unfair or based on incomplete or inaccurate information, they can contact the company to ask for an explanation. It may be possible to clear up any misunderstandings or pursue a formal appeal. Borrowers can also explore other loan programs with the same lender or shop around with other lenders.
It is worth noting that while the underwriting process is generally standardized, there may be variations depending on the lender and the specific loan program. It is always recommended to consult with a mortgage professional for personalized guidance and to ensure a smooth underwriting process.
