Underwriting in the mortgage process, explained

If you’re on your way to securing a mortgage to purchase a home, one step you’ll inevitably come across is underwriting. The underwriting component is crucial to understand because it dictates whether you’ll get final loan approval.

And without this approval, you won’t be able to move forward with a home purchase – which, of course, is the goal.

What is underwriting?

Underwriting is the process of your lender verifying details about you and your financial situation before issuing a definitive sign-off on your loan application. An underwriter, who’s an employee of the mortgage lender, will take a close look at your income, assets, debt, credit report and property details.

Underwriting happens behind the scenes, but that doesn’t mean you won’t be involved. Your lender may ask for additional documents, such as proof of assets or answers to an underwriter’s questions. These questions might pertain to the origin of bank deposits that the lender flagged for further review.

Timeline of the underwriting process

Underwriting can be a lengthy process, and this time can seem even longer when you’re eager to move on with your home purchase. The timeline varies widely based on a number of factors, some of which might not be in your control.

How long does underwriting take?

Your mortgage can be as unique as your financial situation, so the exact amount of time underwriting takes will vary by borrower. While the process may only last a few days, it usually takes 30 – 45 days.

The sooner all the necessary documentation is in the hands of the underwriter, the smoother the mortgage application process will be, so it’s important to get all requested information to your lender promptly.

Factors affecting underwriting duration

Because much of the underwriting process is done by someone else, a home buyer often has limited control over this. The lender might have a large number of applications, and individual lender policies and procedures can also affect the timeline. If you have a particularly complex financial situation, this can also slow things down. Be sure that you have all your paperwork in order and provide information up front instead of waiting to be asked for it.

What does a mortgage underwriter do?

In the later stages of the home buying journey, an underwriter will assess your finances and credit history to determine your creditworthiness and ability to repay the mortgage.

The underwriter decides whether a lender will approve your loan and works with you to make sure you’ve submitted all your paperwork. Ultimately, the underwriter will guarantee you don’t close on a mortgage you can’t afford. If you don’t meet the lender’s requirements, the mortgage underwriter will deny the loan.

What makes up the mortgage underwriting process?

During the process, an underwriter looks at four main areas to get a more complete picture of a borrower’s financial profile.

Verifying income

Your underwriter must verify you earn enough income to cover your monthly mortgage payments. To confirm your financial readiness, you must typically provide three types of documents that verify your income:

• W-2s from the last 2 years
• Your two most recent bank statements
• Your two most recent pay stubs

Are you self-employed? Do you own a sizable share in a business? If so, you’ll need to furnish a few documents in place of W-2s: profit-and-loss statements, K-1s, balance sheets, and your personal and business tax returns.

Your underwriter will verify that your income matches your reported income, and they’ll verify your employment status with your employer.

Property appraisal

An appraisal is almost always required when you purchase a home. It protects you and your lender by ensuring you borrow no more than the home is worth.

A professional appraiser will:

• Inspect the home: This involves taking pictures and measurements to assess the house’s condition and features to determine home value.
• Evaluate the home against comps: The appraiser will consider how the home stacks up to comps, which are nearby properties that are similar in size and have similar features. Generally, these real estate comps must’ve been sold within the past 6 months.

What the underwriter does with the appraisal

After the appraiser determines the property’s value, the underwriter will compare the appraised amount to the mortgage loan amount.

Your underwriter may suspend the application if the home is valued for less than the mortgage amount. Your options in this situation are to contest the appraisal, negotiate with the seller to lower the purchase price, come up with the difference on your own or walk away from the property.

Checking credit history

An underwriter also evaluates your credit score, which represents how reliably you repay debt. A good credit score signals that you make on-time payments, likely helping you qualify for a lower interest rate.

Minimum credit score requirements

The minimum credit score you’ll need will depend on the lender and the type of loan you apply for. See the minimum credit score or credit score range for three popular home loan programs, all available through Rocket Mortgage^?:

• Conventional conforming loan: The minimum credit score for this, the most popular type of loan, is typically 620.
• Federal Housing Administration (FHA) loan: The minimum credit score is 580, or somewhere in the 500 to 579 range with a 10% down payment. Not all FHA lenders accept a credit score below 580, however.
• Department of Veterans Affairs (VA) loan: There’s no credit score requirement from the VA, so each lender establishes a minimum score for borrowers.

Your underwriter will also pull your credit report to review your payment history, your credit usage and the age of your credit accounts.

Debt-to-income ratio

The underwriter must also determine your debt-to-income ratio (DTI) – the total you spend monthly on debt payments divided by your gross monthly income.

An example of how to calculate DTI

Suppose you earn $5,000 a month and spend $1,400 in rent, $300 on an auto loan and $400 in student loan payments.

Divide $2,100 (your combined monthly debt) by $5,000 to determine your DTI, which, in this case, is 0.42, or 42%. Always multiply the decimal by 100 to get your DTI, which is expressed as a percentage.

Asset Information

Your assets can increase your chances of mortgage approval because you can sell them for cash, supplementing your income if you experience financial hardship. An underwriter will likely review these assets:

• Checking account
• Savings account
• Real estate
• Stocks
• Personal property

Since closing costs are usually 3% – 6% of the purchase price, lenders also look at assets to ensure you can cover your mortgage payments after paying your closing costs.

Essential documents for underwriting checklist

• Loan application
• Credit report
• Tax returns (typically for the last 2 years)
• Pay stubs (typically for the last 30 days)
• W-2 forms (typically for the last 2 years)
• Bank statements (typically for the last 2 months)
• Proof of assets (retirement accounts, investment accounts)
• Employment verification (letter or contact information)
• Purchase agreement for the home
• Appraisal report of the property
• Debt statements (car loans, student loans, credit card statements)
• Documentation of any additional income (bonuses, alimony)

How to have the best underwriting experience

Although your lender will handle most of the underwriting process for you, a few tips can still come in handy.

Tip #1: Don’t apply for any new credit lines during underwriting

Any major expenditures or changes to your finances from recent times can cause problems during underwriting. These include new lines of credit and loans, which can both interrupt this process.

Also, avoid making any purchases that may decrease your assets. Once you close on your mortgage, you can move ahead with any planned purchases.

Tip #2: Respond to inquiries as quickly as possible

Your lender may contact you during underwriting to request additional financial documents, such as more bank statements or other proof of income or assets. Respond to these requests as quickly as you can, because your underwriter can’t proceed or approve your home loan until you do.

Tip #3: Be upfront and honest about your finances

Your underwriter will know if you’re not honest about your income, credit history or assets, so withholding information is useless. Include notes and letters of explanation for entries that may stick out on your credit report or other financial statements.

For example, if your credit report shows a missed payment, your underwriter may be more lenient with you if they know it’s due to an unexpected medical expense or a bill close to the credit card’s due date.

The bottom line: Get acquainted with the underwriting process

As a financial expert who makes the ultimate call on whether you’re a good candidate for a mortgage, an underwriter is a key figure in the home buying journey. For this reason, it’s a good idea to be familiar with the job of an underwriter and what you can expect from working with one.

If you haven’t begun seeking a home loan, getting initial approval is a great place to start. Initial approval is typically easy and quick and will help you understand your financial options better. It’s all you need to embark on loan shopping and house hunting.