What Is Mortgage Underwriting?

You finally found your dream home. You’re already envisioning what color to paint the kitchen and turning that room on the main floor into your private oasis. But before you start buying decorating magazines, remember there’s still some house cleaning items to take care of, namely, the mortgage underwriting process. Yes, this is the boring part, but remember as you’re assembling all your papers and picking a lender that the mortgage underwriting process is a valuable part of seeing your home buying dreams fully realized.

How Does Mortgage Underwriting Work?

Buying a home is typically the largest purchase most of us will make in our lifetime and it’s because of this that the mortgage underwriting process is necessary. By taking a look at your financial status and history with money, the mortgage underwriting process helps a potential lender determine if you’re able to pay back the money they lend you for a mortgage. While it seems like a confusing step, it is possible to understand how the process works. Let’s break it down.

What Is An Underwriter?

Underwriting might not sound glamorous, but mortgage underwriters have more power than you might think. Their opinion will determine if you get to send out “We’ve Moved!” announcements or if you’re staying put.

An underwriter is focused on answering one question: Can you pay back the money we lend you for this house? The answer involves looking at several factors that assess both your past and future relationships with money. Underwriters then take that information and boil it down to what is known in the mortgage underwriting business as the three C’s: credit, capacity, and collateral.

What Does A Mortgage Underwriter Do?

The underwriter’s job is to figure out if you’ll be a reliable loan risk. Their company is thinking about loaning you a substantial amount of money, so they give careful consideration to your ability to meet the terms of your mortgage successfully.

The saying “past behavior predicts future outcomes” will be a focus in your mortgage underwriter’s mind as they review your application. Underwriters look at your current and past debt, your payment history, assets, employment and income to determine if you have the financial bandwidth to take on a mortgage payment

A mortgage underwriter is also going to take a look at the home you want to purchase. Is it REALLY a dream house, or are there hidden nightmares like bad pipes or foundational cracks that make it not worth the asking price? This is why inspections and appraisals are all part of mortgage underwriting.

Underwriters will also consider your investment. Your application will be more attractive to an underwriter if you offer a significant down payment, because it’s less money they have to lend you. Putting down at least 20% of the purchase price is recommended as the “sweet spot,” which has the added benefit of allowing you to skip private mortgage insurance (PMI), a win-win for all parties involved.

Can An Underwriter Deny A Mortgage?

Yes. According to the Consumer Financial Protection Bureau, 1 in 10 mortgage applications get rejected. While it’s nothing personal, a rejection can feel like a slap in the face. There are several aspects that go into an underwriter’s decision, so if you’re denied, it’s worth finding out why before you start the process over again. Maybe the underwriter thought the home was overvalued, or there’s errors in your credit report that could have made a difference. Determining why you got the “reject” stamp can help you re-group for next time.

How Long Does Mortgage Underwriting Take?

The underwriting process can take anywhere from a few days to several weeks, and can depend on items like missing paperwork or the type of loan for which you’re applying. There are ways to hasten the process, like pre-qualifying methods or certified buyer programs lenders like Interfirst Mortgage provides. Talk to your lender for suggestions that could help make the underwriting process move faster.

Automated vs. Manual Underwriting

Another aspect that can impact speed is if your lender is using an automated process or manual underwriting to approve your application. What’s the difference? More than you might think.

What Is Automated Underwriting?

You know the phrase “looks good on paper”? That saying can easily apply to the automated underwriting process. Utilizing a digital program, automated underwriting takes basic information about the applicant (such as social security number and annual income) to obtain your credit score and employment history. These results are then run through a formula to determine if your application deserves a “pass” or “fail” grade. You’ll still have to provide some paperwork to finalize your loan application, but if you have a healthy credit rating and a steady income, automated underwriting can likely approve your application quickly.

What Is Manual Underwriting?

What if your situation is a little more tricky? Maybe thanks to a windfall you have a big down payment but your credit history isn’t perfect, or you’re self-employed and your annual income has varied over recent years. This will likely mean your application will require manual underwriting, where an actual human underwriter will look through background information and paperwork to determine if your application is worth the risk. Manual underwriting understandably takes more time, but having a set of “real” eyes on the page can benefit a borrower that requires a deeper look.

What Steps Go Into The Underwriting Process?

Most mortgage loans involve a significant amount of money changing hands, so it’s important that the process is a thorough one. Here’s an overview of the steps involved.

Get Prequalified For A Mortgage Loan

Whether you’ve just started looking for a house or have been dreaming of a new home for years, the first step to making the experience go efficiently will involve you pre-qualifying for a mortgage loan. Luckily, it’s a relatively painless process these days. Experienced mortgage loan companies like Interfirst typically offer a pre-qualifying option on their website.

When you decide it’s time to pre-qualify, you’ll need some basic information about your current financial position, including your assets, account balances, and income sources. This information will help a mortgage underwriter begin the process of getting your loan approved.

Verification Of Income

The next step will be verifying your income. Most mortgage lenders will ask you to provide them with pay stubs from your place of employment, and will want to see anywhere from the last two weeks to several months of past paychecks. Underwriters will be interested in your net vs. gross income. For example, while your annual income might be $60k/year, if you’re having money taken out of each paycheck for healthcare insurance, 401k investments, and a 529 plan for your child’s education, your net paycheck might reflect a much different number after all those deductions are removed.

Underwriters analyze your bills in relation to your current net income, which is your debt-to-income ratio. This ensures you will have enough money to pay your existing bills as well as your monthly mortgage payment comfortably.

Home Appraisal

The next step on the yellow brick road to mortgage underwriting approval will be getting an appraisal on the proposed property. This step benefits both parties, because an appraisal can find hidden issues that may be small now, but could become a problem through years of home ownership. Small issues can provide you with some negotiation room on the purchase price, and if larger issues are exposed, it can protect you and the mortgage company from making an investment neither of you would be able to recoup.

Your mortgage company will pick a third party, independent appraiser for this task. While the cost of the appraisal will likely get passed onto you, it’s an investment that in the end is well worth the cost.

Credit Evaluation

Remember when you were in college and your parents warned you one day you’d regret misusing credit? Welcome to the day of reckoning.

When you’ve decided to purchase a home, mortgage underwriters will review your credit score but will also do a deeper dive into your credit history. Rent and previous mortgage payments, insurance installments, and even utility bills can all play a role in obtaining a fuller picture of how you have paid bills. This information can determine the risk in lending you the money, and can also influence what type of percentage rates and lending package they can offer you.

Proof Of Assets

If 2020 taught us anything, it’s that life throws some unexpected curveballs. Mortgage underwriters are well aware of this, so when assessing a loan candidate, they’ll want to take a look at your assets, or what means you’ll have at the ready should life throw one of those your way.

Mortgage underwriters will ask for verification of both your liquid and non-liquid assets. Liquid assets include items that can easily be turned into cash, such as checking and savings accounts, stocks, or 401k accounts. Non-liquid assets are items that hold value but take an extra step to liquidate, such as jewelry, cars, or expensive art work. Proving ownership of these items will make a mortgage underwriter feel secure that a bump in the road won’t result in you missing mortgage payments.

Underwriting Decision Making

Once a mortgage underwriter has conducted a thorough review of your application, they will render one of 4 possible verdicts on your application: approved, approved with conditions, suspended, or denied. While the obvious goal is to get an approval, don’t lose faith if your mortgage underwriter issues an “approved with conditions” or “suspended” result.

Approved with conditions could mean more documentation is needed or they’re waiting on an appraisal report. Suspended means that the application is in a holding pattern until the underwriter can verify important information, like your income or employment. If your mortgage application is denied, find out why. Your lending company can make suggestions on how to fix the situation for when you apply for a mortgage at a later date.

Time to Buy!

Most of us have buying a home on our list of life goals. Understanding the steps involved can help you navigate the tough terrain of the mortgage underwriting process. By keeping a handle on your use of credit, setting actionable, achievable financial goals, and using a helpful, knowledgeable lender, you can turn your dream of being a homeowner into reality.


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This page last updated: March 21, 2022