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How the mortgage underwriting process works
The seller has accepted your offer, and youโre on the brink of buying a house. But before you can move in, you must get approved for a home loan. Thatโs where the mortgage underwriting process comes into play.
Weโll share everything a borrower should know about mortgage underwriting โ including how to make the process go more smoothly. That way, you can feel confident the property is as good as yours.
In this article:
What is mortgage underwriting, and how does it work?
Underwriting determines whether a borrower qualifies for the mortgage theyโve 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 .
โThe underwriter is the โgatekeeperโ for the lender and the individual who issues the final approval to extend credit to the buyer,โ 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 youโre 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 , via email. However, underwriters must adhere to separate parameters for FHA and VA mortgages.
โSome lenders may add additional requirements (such as a higher minimum credit score) to these guidelines to be more conservative. These are known as โlender underwriting overlays,โ" said Jampedro.
According to Jampedro, the underwriter actually handles your home-buying file twice. First, theyโll review your information to determine whether you initially qualify for a particular home loan type. If you do, the underwriter will issue a . Getting preapproved can help your offer stand out in a competitive market.
Then, once youโre under contract to buy a property, the underwriter will review your personal and financial information again. Theyโll also determine if the specific home you want to purchase can be financed by the youโve applied for.
What does the underwriter assess?
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?
. 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 youโre trying to borrow? Is the residence safe to occupy?
โLike the four legs of a table, all [of the above] are equally important,โ 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.
โ[You] shouldnโt black out any information on [your] documents, such as bank account numbers or deposits. There canโt be any redacted documents submitted,โ 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 โ for example, if the sellers donโt actually have the right to sell the property. Youโll also have to submit proof of , which protects the lenderโs investment.
Manual vs. automated underwriting
A mortgage can be underwritten in two ways: manually or via an automated tool. โ[The] majority of loans go through an automated underwriting process called AUS (automated underwriting system). [For example], Fannie Maeโs system is called Desktop Underwriter, and Freddie Macโs system is called Loan Product Advisor,โ said Schachter.
โAutomated underwriting is used for loans that follow guidelines or government-backed mortgage guidelines such as FHA and VA loans,โ Jampedro said. โThe 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.โ
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 didnโt approve your mortgage application the first time.
The two loan underwriting methods arenโt mutually exclusive, though. An underwriter might use both automated and manual methods if your finances arenโt a clear match for the type of mortgage you want. Jampedro explained that they also might use both if youโre applying for an uncommon loan type that still has a similar process as more popular loans.
Potential outcomes of the mortgage underwriting process
โBuyers 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,โ said Jampedro.
Schachter pointed out that most initial loan approvals are conditional, though.
Of course, thereโs 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 donโt 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. , or other types of debt. If possible, donโt change jobs or make any large withdrawals from any accounts.
Note: If your underwriter doesnโt have enough information to make a decision, they may suspend your application until you provide the requested documentation.
Mortgage underwriting process FAQs
How long does the mortgage underwriting process take?
โUnderwriting 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,โ Jampedro said. โThe average time for underwriting is between one and five business days.โ
Do I have to pay for mortgage underwriting?
โSome lenders charge for the underwriting process, and that could increase closing costs relative to other lenders,โ said Jampedro. โTypical 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.โ
What needs to happen before mortgage underwriting?
Before an underwriter can review your information and issue a lending decision, you must submit a loan application. Then, youโll 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.