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How the mortgage underwriting process works

Yahoo Personal Finance· Getty Images
Updated 6 min read

The seller has accepted your offer, and you’re on the brink of buying a house. But before you can move in, you must get approved for a home loan. That’s where the mortgage underwriting process comes into play.

We’ll share everything a borrower should know about mortgage underwriting — including how to make the process go more smoothly. That way, you can feel confident the property is as good as yours.

Learn more: How to make an offer on a house

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Underwriting determines whether a borrower qualifies for the mortgage they’ve applied for and aims to mitigate risks for the lender. The mortgage lender typically charges you for underwriting as a closing cost. You may see it listed as an underwriting fee on your loan documents, or it could be included under the umbrella of another closing cost, such as a mortgage origination fee.

“The underwriter is the ‘gatekeeper’ for the lender and the individual who issues the final approval to extend credit to the buyer,” said Josh Jampedro, vice president of Home Loan Advisors, via email. This person will underwrite the mortgage based on specific guidelines associated with the type of home loan you’re trying to obtain.

For instance, underwriters follow Fannie Mae or Freddie Mac guidelines for borrowers who want conventional loans, said Jeremy Schachter, branch manager at Fairway Independent Mortgage, via email. However, underwriters must adhere to separate parameters for FHA and VA mortgages.

“Some lenders may add additional requirements (such as a higher minimum credit score) to these guidelines to be more conservative. These are known as ‘lender underwriting overlays,’" said Jampedro.

According to Jampedro, the underwriter actually handles your home-buying file twice. First, they’ll review your information to determine whether you initially qualify for a particular home loan type. If you do, the underwriter will issue a mortgage preapproval. Getting preapproved can help your offer stand out in a competitive market.

Then, once you’re under contract to buy a property, the underwriter will review your personal and financial information again. They’ll also determine if the specific home you want to purchase can be financed by the type of mortgage loan you’ve applied for.

Read more: The minimum credit score needed to buy a house

Jampedro said that underwriters primarily look at the following four areas:

  • Credit history. Is your credit score high enough? Do you have a history of paying creditors on time?

  • Debt-to-income ratio (DTI). Do you earn enough money to repay your new mortgage and your current debts?

  • Assets. Do you have enough money and cash flow to cover the down payment and closing costs? Will you have money left over after finalizing your home loan?

  • Property. Does your house appraise for at least as much as you’re trying to borrow? Is the residence safe to occupy?

“Like the four legs of a table, all [of the above] are equally important,” said Jampedro.

Your underwriter will review several documents to help inform their credit decision. Schachter said you should be prepared to provide your recent pay stubs, bank statements, and brokerage or retirement account statements. You should also respond quickly to requests for additional information.

“[You] shouldn’t black out any information on [your] documents, such as bank account numbers or deposits. There can’t be any redacted documents submitted,” warned Schachter.

In addition, your underwriter will read through a title report on the residence to make sure there is no legal issue stopping you from buying the home — for example, if the sellers don’t actually have the right to sell the property. You’ll also have to submit proof of homeowners insurance, which protects the lender’s investment.

Learn more: How does title insurance work?

A mortgage can be underwritten in two ways: manually or via an automated tool. “[The] majority of loans go through an automated underwriting process called AUS (automated underwriting system). [For example], Fannie Mae’s system is called Desktop Underwriter, and Freddie Mac’s system is called Loan Product Advisor,” said Schachter.

“Automated underwriting is used for loans that follow conventional mortgage guidelines or government-backed mortgage guidelines such as FHA and VA loans,” Jampedro said. “The system will analyze the submitted information to make sure it meets the program guidelines and issue the underwriter a credit decision along with the stipulations necessary to certify that approval.”

For example, if the system shows that you make $5,000 per month, your underwriter will need to confirm that claim by looking at your paystubs, explained Schachter.

Sometimes, your underwriter may need to make a lending decision without using an AUS, a process known as manual underwriting. The manual process is typically used for less common types of mortgage loans or if the automated process didn’t approve your mortgage application the first time.

The two loan underwriting methods aren’t mutually exclusive, though. An underwriter might use both automated and manual methods if your finances aren’t a clear match for the type of mortgage you want. Jampedro explained that they also might use both if you’re applying for an uncommon loan type that still has a similar process as more popular loans.

Learn more: What is a bridge loan?

“Buyers can be approved to purchase the home unconditionally, meaning that the underwriting is complete, and closing can occur at any time, or conditionally, which is when the loan is approved to close only on the condition that other factors are met such as the sale of their current home or the payment of an existing debt,” said Jampedro.

Schachter pointed out that most initial loan approvals are conditional, though.

Of course, there’s another, less positive potential outcome: application denial. Your application could get denied for several reasons, including a high debt-to-income ratio (DTI) or poor credit history.

If the underwriter determines that you don’t qualify for the mortgage, they will explain why. Then, you can fix the issue (such as paying off debt or looking into a different type of loan) and try to apply again.

You can improve your mortgage approval odds by keeping your employment and finances stable while your home purchase is still under contract. Don’t apply for a new credit card after applying for a mortgage, or other types of debt. If possible, don’t change jobs or make any large withdrawals from any accounts.

Note: If your underwriter doesn’t have enough information to make a decision, they may suspend your application until you provide the requested documentation.

Learn more: Closing on a house — What to expect and how to prepare

“Underwriting turn times can vary from a few hours when business is slower for the lender up to as long as 30 days if the company is behind,” Jampedro said. “The average time for underwriting is between one and five business days.”

“Some lenders charge for the underwriting process, and that could increase closing costs relative to other lenders,” said Jampedro. “Typical costs range from $900 to $1,800. Some lenders and brokers do not charge an underwriting fee to the consumer at all but may have different interest rates to compensate for this.”

Before an underwriter can review your information and issue a lending decision, you must submit a loan application. Then, you’ll provide your loan officer with supporting documentation, such as pay stubs and bank statements. Finally, your loan officer or loan processor will give your underwriter all your paperwork as one package.

This article was edited by Laura Grace Tarpley