What Is Underwriting? Understanding The Underwriting Process

Underwriting is a crucial component of the mortgage process that dictates whether you’ll get final loan approval. Let’s dive in and learn more about underwriting and how it works.

Underwriting is the process of your lender verifying your income, assets, debt, credit and property details to issue final approval on your loan application.

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, such as the origin of flagged bank deposits.

During the appraisal process for your future home, a mortgage underwriter will assess your finances and credit history to determine your creditworthiness and ability to repay the mortgage.

The underwriter helps a mortgage lender decide whether to approve your loan and works with you to make sure you’ve submitted all your paperwork. Ultimately, the underwriter will help ensure you don’t close on a mortgage you can’t afford. If you don't qualify, the mortgage underwriter can deny the loan.

An underwriter can:

• Investigate your credit history: Underwriters look at your credit score and pull your credit report. They look for late payments or bankruptcies and examine your credit history and more.

• Order an appraisal: Your underwriter will order an appraisal to make sure the loan amount the lender offers for the home matches the home’s actual value.

• Verify your income and employment: Your underwriter will ask for proof of income and employment.

• Look at your debt-to-income ratio (DTI): Your DTI is a percentage that tells lenders how much money you spend versus how much income you bring in. An underwriter examines your debts and compares them to your income to ensure you have enough cash flow to cover your monthly mortgage payments, including your propertytaxes and homeowners

• Verify your down payment and savings: The underwriter will look at your bank account(s) to make sure you have enough in savings to make a down payment at closing and supplement your income if you ever experience financial hardship.

Your mortgage can be as unique as your financial situation. The exact amount of time underwriting takes will vary by borrower.

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 documents to your lender promptly.

The underwriting process evaluates your current finances and past credit decisions. During the underwriting process, your underwriter looks at four areas to get a more complete picture of your financial situation:

Income

Your underwriter must verify you earn enough income to cover your monthly mortgage payments. To confirm your financial readiness, you must provide three types of documents to verify your income: W-2s from the last 2 years, your two most recent bank statements and your two most recent pay stubs.

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

Your underwriter will check that your income matches your reported income and verify your employment status with your employer.

Appraisal

Appraisals are almost always required when you purchase a home. They protect you and your lender because an appraisal can ensure you only borrow what the home is worth.

A professional appraiser will inspect the property, walking through the home to take pictures and measurements to evaluate the home’s condition and features to determine the home’s value. The appraiser compares the home toproperties in the area that are similar in size and have similar features. The appraiser’s real estate comps must've been sold within the past 6 months and ideally located within a mile of the property – unless the property is in a rural area.

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 less than the mortgage amount. In this situation, you can 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.

Credit

An underwriter also evaluates your credit score. Your credit score, a crucial three-digit number, represents how reliablyyou repay debt. A good credit score signals that you pay back your debts on time, and that can help you qualify for a lower interest rate.

The minimum credit score you’ll need will depend on the type of loan you apply for. For a conventional loan, your minimum credit score should be at least 620.

If you apply for a Federal Housing Administration (FHA) loan, the minimum credit score is 580 or 500 with a 10% down payment. A Department of Veterans Affairs (VA) loan has no minimum credit score requirement, but some lenders may set their own minimum credit score.

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

Debt-To-Income Ratio

The underwriter must also determine your debt-to-income ratio, the total amount of money you spend on bills and expenses each month divided by your gross monthly income (pretax income). Lenders prefer a DTI ratio at or below 50%.

Here’s an example of how to calculate DTI: Let’s say 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 ratio, which, in this case, is 0.42, or 42%.

Asset Information

Your assets can help increase your chances of mortgage approval because you can sell them for cash, which can help supplement your income if you experience financial hardship. An underwriter will likely review your checking and savings accounts, real estate, stocks and personal property.

Since closing costs can range from 3% – 6% of the total loan amount, lenders also use assets to ensure you can cover your mortgage payments after paying your closing costs.

Your lender handles most parts of the underwriting process for you. However, we have a few tips you can use to help ensure you have the best experience possible.

Tip #1: Don’t Apply For Any New Credit Lines During Underwriting

Any major financial changes and spending can cause problems during the underwriting process. New lines of credit or loans can 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

During underwriting, your lender may contact you and request additional financial documents, such as bank statements or other proof of income or assets. Respond to these requests as quickly as you can – your underwriter can’t proceed or approve your home loan without them.

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 there’s no use hiding any information. Include notes and explanations for entries that may stick out on your credit report or 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.

Underwriting simply means that your lender verifies your income, assets, debt, credit and property details to issue final loan approval. An underwriter is a financial expert who looks at your finances and assesses whether you are a good candidate for loan approval.

It’s a good idea to actively respond to your lender’s inquiries and requests as soon as possible throughout the underwriting process. Be upfront and honest about your finances, or this can cause delays in the loan application process.

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