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Hero Images/Getty Images August 08, 2022 Checkmark Bankrate logo How is this page expert verified? At Bankrate, we take the accuracy of our content seriously. "Expert verified" means that our Financial Review Board thoroughly evaluated the article for accuracy and clarity. The Review Board comprises a panel of financial experts whose objective is to ensure that our content is always objective and balanced. Their reviews hold us accountable for publishing high-quality and trustworthy content. Lee writes about mortgages, personal finance and enjoys finding ways for people to hack their finances. Bankrate senior editor for mortgages Bill McGuire has been writing and editing for more than four decades at major newspapers, magazines and websites. Robert R. Johnson, Ph.D., CFA, CAIA, is a professor of finance at Creighton University and chairman and CEO of Economic Index Associates, LLC. Bankrate logo

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At Bankrate we strive to help you make smarter financial decisions. While we adhere to strict editorial integrity, this post may contain references to products from our partners. Here's an explanation for how we make money. Bankrate logo

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Founded in 1976, Bankrate has a long track record of helping people make smart financial choices. We’ve maintained this reputation for over four decades by demystifying the financial decision-making process and giving people confidence in which actions to take next. Bankrate follows a strict , so you can trust that we’re putting your interests first. All of our content is authored by and edited by , who ensure everything we publish is objective, accurate and trustworthy. Our mortgage reporters and editors focus on the points consumers care about most — the latest rates, the best lenders, navigating the homebuying process, refinancing your mortgage and more — so you can feel confident when you make decisions as a homebuyer and a homeowner. Bankrate logo

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You have money questions. Bankrate has answers. Our experts have been helping you master your money for over four decades. We continually strive to provide consumers with the expert advice and tools needed to succeed throughout life’s financial journey. Bankrate follows a strict , so you can trust that our content is honest and accurate. Our award-winning editors and reporters create honest and accurate content to help you make the right financial decisions. The content created by our editorial staff is objective, factual, and not influenced by our advertisers. We’re transparent about how we are able to bring quality content, competitive rates, and useful tools to you by explaining how we make money. Bankrate.com is an independent, advertising-supported publisher and comparison service. We are compensated in exchange for placement of sponsored products and, services, or by you clicking on certain links posted on our site. Therefore, this compensation may impact how, where and in what order products appear within listing categories. Other factors, such as our own proprietary website rules and whether a product is offered in your area or at your self-selected credit score range can also impact how and where products appear on this site. While we strive to provide a wide range offers, Bankrate does not include information about every financial or credit product or service. If you’re like most people who , you’ll take out a mortgage to finance the purchase. The process that mortgage lenders use to assess your creditworthiness and determine whether to approve you for that loan is called underwriting. Here is what you need to know about the mortgage underwriting process.

What is mortgage underwriting

Underwriting is a of assessing the risk of lending money to you. The bank, credit union or lender has to determine whether you are likely to be able to pay back the home loan before deciding whether to approve your , and does this through underwriting. Before underwriting, a loan officer or collects the many documents necessary for your application. An underwriter then verifies your identification, checks your credit history and assesses your financial situation — including your income, cash reserves, investments, financial assets and other risk factors. Many lenders closely follow underwriting guidelines from Fannie Mae and Freddie Mac.

What does a mortgage underwriter do

A mortgage underwriter’s job is to assess delinquency risk, meaning the overall risk that you will not be able to repay the mortgage. To do so, the underwriter evaluates factors that help the lender understand your financial situation, including: Your Your credit report The property you intend to buy The underwriter then documents their assessments and weighs various elements of your loan application as a whole to decide whether the risk level is acceptable. Here’s an example from Fannie Mae’s underwriting guidelines. For a single-family home that’s to serve as a primary residence, assume the lender typically requires the following: Maximum of 97 percent Credit score of 640 or higher Maximum of 36 percent If a borrower falls short in one area, the loan might still be approved based on the strength of the other two factors, and/or factors such as: Whether you will occupy the property Amortization schedule Type of property and how many units it has Financial reserves or assets (e.g., investment accounts, retirement accounts, savings in the bank) So, if you had a higher DTI — say 40 percent — you might get approved for a mortgage as long as you have a better credit score. If your LTV ratio was lower than 97 percent, you might be able to get mortgage approval even with a lower credit score, like 620.

The mortgage underwriting process in 5 steps

Underwriting can be a long process. Each lender uses slightly different methods and processes, but the five major steps of underwriting are: Preapproval Income and asset verification Appraisal Title search and insurance Making a lending decision

1 Getting preapproved

Your very first step — even before you start looking for a home — is to get preapproved for a mortgage. To determine whether you’re preapproved, a lender will review your financial information, such as your income and your debts, and run a credit check. Keep in mind that mean two different things. In general, a preapproval serves as an indication from a lender that you’ll be approved for a certain amount of financing — provided your financial situation doesn’t change. A prequalification is simply an indication you could be approved for a loan. Obtaining a preapproval usually requires you to furnish more information to the lender compared to a prequalification.

2 Income and asset verification

Be prepared to have your income verified and provide other financial documentation, such as tax returns and bank account statements. Assets that will be considered include money in your bank accounts, retirement savings, your investment accounts, the cash value of your life insurance policies and ownerships in business where you have assets in the form of stock or retirement accounts. If you’re deemed qualified, your lender will issue a preapproval letter stating that it is willing to lend you up to a certain amount based on the information you provided. A preapproval letter shows the seller that you’re a serious buyer and can back a purchase offer with financing. Use to figure out how much you need.

3 Appraisal

Once you’ve found a house you like that fits your budget and have made an offer on it, a lender will conduct an . This is to assess whether the amount you offered to pay is appropriate based on the house’s condition and in the neighborhood. The for a single-family home varies from a few hundred dollars to over a thousand, depending on the complexity and size of the home.

4 Title search and title insurance

A lender doesn’t want to lend money for a house that has legal claims on it. That’s why a performs a to make sure the property can be transferred. The title company will research the history of the property, looking for mortgages, claims, liens, easement rights, zoning ordinances, pending legal action, unpaid taxes and restrictive covenants. The title insurer then issues an insurance policy that guarantees the accuracy of its research. In some cases, two policies are issued: one to protect the lender (this is almost always required) and one to protect the property owner (optional, but can be worth getting).

5 Underwriting decision

Once the underwriter thoroughly reviews your application, the best outcome is that you are approved for a mortgage. That gives you the all-clear to proceed to closing on the property. However, you might receive one of these decisions instead: Denied
If your , you’ll need to understand the specific reason for the denial to determine your next steps. If the lender thinks you have too much debt, you might be able to lower your DTI ratio by paying down credit card balances. If your credit score didn’t make the cut, recheck your credit report for mistakes and take steps to improve your score. You could possibly apply again in a few months, apply for a smaller loan amount or try to assemble a larger down payment to compensate. Suspended
This might mean some documentation is missing from your file, so the underwriter can’t make an evaluation. Your application could be suspended if, for example, the underwriter couldn’t verify your employment or income. The lender should tell you whether you can reactivate your application by providing additional information. Approved with conditions
Mortgage approvals can come with conditions such as the need to furnish additional pay stubs, tax forms, proof of mortgage insurance, proof of insurance or a copy of a marriage certificate, divorce decree or business licenses. Once you clear any conditions and get your mortgage approved, your home purchase is almost complete. The final step is closing day, which is when the lender funds your loan and pays the selling party in exchange for the title to the property. This is when you’ll sign the final paperwork, settle any that are due and receive the keys to your new home.

How long does mortgage underwriting take

The mortgage underwriting process can take anywhere from a few days to a few weeks, depending on whether the underwriter needs additional information from you, how busy the lender is, and how streamlined the lender’s practices are. The quicker you compile your documents and respond to the lender’s requests for information, the smoother and speedier the process can be. Keep in mind, however, that underwriting is just one part of the overall lending process. You can expect to on a loan in 40-50 days.

Automated underwriting vs manual underwriting

A mortgage underwriter can assess your loan application manually or run it through an program, known as automated underwriting, to determine whether to approve you for a loan. Automated underwriting is usually completed faster than , but since a computer is doing the evaluating, it has some limitations that might not make it ideal for borrowers with unique circumstances, such as inconsistent income. In these cases, it can be easier to qualify a borrower through manual underwriting as opposed to an automated system. Sometimes, too, lenders use a combination of automated and manual underwriting in order to gauge risk.

How strict is mortgage underwriting

In 2020, 9.3 percent of applications for a home purchase loan were denied, according to Home Mortgage Disclosure Act data. For the most part, mortgage lenders follow specific standards for the loans they originate. For conventional loans, lenders adhere to Fannie Mae and Freddie Mac standards, because if a loan meets those requirements, the lender can sell it on the secondary market and use that capital to create more mortgages for more borrowers. For an FHA, VA or USDA loan, lenders follow the guidelines of the Federal Housing Administration, Department of Veterans Affairs and Department of Agriculture, which guarantee or insure those types of loans if the borrower defaults. Lenders also have to account for the business of making mortgages — they can’t take on more risk than what their operation supports. So, in addition to baseline loan standards, lenders can impose additional requirements, known as “overlays.” Sometimes, lenders implement stricter protocols in response to economic volatility. Throughout the pandemic, for example, many lenders began requiring higher credit scores and larger down payments. That said, some lenders can be flexible, such as allowing a borrower to qualify based on .

Tips for a smooth mortgage underwriting process

1 Have your documents organized

The best way to keep the mortgage underwriting process on track is to have all of your financial documents organized before you apply for a loan. If you have to request paperwork from a specific institution, for instance, do so as soon as possible. It can be smart to put together a file that includes the following: Employment information from the past two years (if you’re , this includes business records and tax returns) W-2s from the past two years Pay stubs from at least 30 to 60 days prior to when you apply Account information, including checking, savings, money market, CDs and retirement accounts Additional income information, such as alimony or child support, annuities, bonuses or commissions, dividends, interest, overtime payment, pensions or Social Security payments In addition, if you plan to use gifted funds for a down payment, it’s important to have those funds in your possession (in other words, in an account in your name) well before you apply. You’ll also need to have a to verify that the money is indeed a gift. Doing both can help you avoid unnecessary setbacks in underwriting. One thing to note is that you should only provide the documents the lender asks for. If you provide additional documentation it can slow down the process.

2 Get your credit in shape

A lower credit score can make it more difficult for you to get approved for a mortgage, and can also make your loan more expensive with a higher interest rate. If your credit score needs improvement, commit to paying down debt. Doing so will raise your credit score and reduce your DTI ratio — many lenders look for 36 percent or less. That gives your application’s chances a double boost. In addition, check your credit report to ensure there are no errors that could negatively impact your score. You can get a copy from the three major credit bureaus at . If you do find a mistake, contact the agency to dispute it as soon as possible.

3 Make a larger down payment

A higher LTV ratio indicates the lender could lose a lot more money if you default on the mortgage. You can reduce your LTV by making a larger down payment upfront. If you put 10 percent down on a $200,000 home, for example, you’d have to take out a $180,000 loan, putting your LTV ratio at 90 percent. If you were to put 20 percent down for the same home, you’d only need a $160,000 mortgage, and your LTV ratio would be 80 percent. This lowers the risk for the lender overall, making you a more attractive candidate for a loan. You can work to save more for a down payment, or ask family or friends for help, if possible. There are also many , including deferred payment loans and grants, that can help, and your lender might offer their own assistance in addition to that. Chase Bank, for instance, offers up to $2,500 to $5,000 towards your down payment if you meet certain criteria.

Getting started with the mortgage underwriting process

If you’re looking to get a mortgage and have all of your documents in order, you’re ready to start comparing loan offers. Ideally, you’ll want to find the loan with the lowest interest rate and fees and the most favorable terms. As you shop around, consider what type of loan will suit your situation — some mortgages are better for lower-income borrowers, for instance, or those with poorer credit — in addition to how long you plan to stay in the home and what you can reasonably afford. SHARE: Lee writes about mortgages, personal finance and enjoys finding ways for people to hack their finances. Bankrate senior editor for mortgages Bill McGuire has been writing and editing for more than four decades at major newspapers, magazines and websites. Robert R. Johnson, Ph.D., CFA, CAIA, is a professor of finance at Creighton University and chairman and CEO of Economic Index Associates, LLC.