What Is the Mortgage Underwriting Process?

How Does the Mortgage Underwriting Process Work?

Underwriting is a key part of the mortgage application process. Here’s where it fits into the process, and what’s involved. 

1. Prequalification or Preapproval

When you apply for a mortgage, you’ll likely be prequalified or preapproved first. The prequalification process involves providing some basic financial details to get an idea of how much you can borrow and at what rates. 

Preapproval is a more detailed financial review that requires you to submit financial documentation to obtain preliminary approval for your loan.

2. Document Collection and Financial Verification

Next, you should gather all of the different documents for a mortgage application that underwriters need to verify your finances. This can include pay stubs, bank statements, and tax returns. Your loan advisor and loan processor will help you know exactly what the underwriter needs.

These documents are important for verifying that you have the assets for your down payment and closing costs, and for proving that you have the necessary income to afford your monthly mortgage payment. 

3. Automated and Manual Underwriting Review

Once you’ve gathered your documents and are ready to move forward with securing full loan approval, your lender will complete the underwriting process. Depending on the lender and the loan you’re applying for, you could go through automated or manual underwriting review.

• Automated underwriting: Automated underwriting is a computer-driven process where technology reviews your financial details and issues a preliminary approval recommendation. Many lenders, including for most conventional loans, rely on automated underwriting as their standard process. Even so, a human underwriter or loan processor still verifies your documentation and confirms your file matches what the system reviewed before your loan receives final approval. 
• Manual underwriting: With manual underwriting, a human underwriter reviews the details of your financial documents and your loan application to see if you should be approved. Many lenders use manual underwriting in more complex situations such as getting a mortgage while self-employed, with non-traditional income sources, or with loans that are slightly out of guidelines but may still be approvable. 

4. Property Appraisal

A home appraisal is a key part of the mortgage underwriting process because the home serves as collateral securing the loan. Lenders use the home’s appraised value to see whether it supports the amount you want to borrow, based on factors including your loan type and its loan-to-value ratio (LTV) requirements.

During the appraisal, a professional appraiser compares your home and its features to real estate comps, which are comparable homes that sold recently in your area. This provides an independent professional opinion of the home’s value, resulting in its appraised value.

An appraisal can help you avoid paying more than a home is worth and it gives the lender some assurance that the home’s value would reasonably be  enough to cover the outstanding loan balance if payments stopped. 

5. Title Search 

A property title search is also necessary before you can get final approval for a loan. Title searches determine if the seller is the legal owner of the home and if there are any competing claims. 

If the title shows ownership disputes or outstanding liens (claims on the home), it will affect whether the home qualifies as collateral for the loan. 

6. Final Approval and Closing Disclosure

You’ll receive final approval for the loan once underwriting has verified that your financial documentation and the value of the home meets the underwriting guidelines for the loan program you selected. 

You’ll receive a Closing Disclosure explaining your loan terms and how much you’re required to pay to close your mortgage. You’ll also need to line up homeowners insurance to close on the loan, as lenders require insurance to be in place to protect the collateral. 

What Can Cause Underwriting Delays?

Many factors could delay the underwriting process and lead to a longer mortgage loan approval time. Some of those factors can be:. 

• Missing or incomplete documentation: If you don’t provide all requested financial forms, underwriters may have to pause their process until they can verify the documents. 
• Unusual financial activity: Lenders are required to verify where your income and assets come from and your current debts. If you have unusual activity like a large unexplained bank deposit or sudden new debt on your credit report, there may be a delay until you can document these transactions.
• Problems with your credit report: If you have frozen credit and underwriters can’t check your score, this could cause a short delay until you grant access. If there are inaccuracies on your credit report that affect your score, you could face a lengthy delay as the issue is corrected. 

Possible Underwriting Outcomes

Once an underwriter reviews your mortgage application and supporting documentation, there are several possible outcomes. Some decisions are final, while others indicate that the underwriter needs additional information or that certain requirements must be met before your loan can move forward.

• Clear-to-close: Your loan has satisfied the underwriting requirements, and you can move forward toward closing. You may still need to complete final steps before closing day, but no additional underwriting conditions are outstanding.
• Approved with conditions: Your mortgage is approved as long as you meet certain conditions before closing. For example, the underwriter may request updated bank statements, proof of homeowners insurance, additional income documentation, or clarification about information in your application.
• Suspended: The underwriter doesn’t have enough information to make a final decision on your application. You may need to provide additional documentation or resolve an issue before underwriting can continue.
• Denied: Your mortgage application doesn’t meet the requirements for approval. If your application is denied, your lender will provide information about the reason for the decision.

An approved-with-conditions or suspended decision doesn’t necessarily mean your mortgage won’t be approved. Responding promptly to requests for additional documentation can help keep the underwriting process moving. If your loan is denied, talk with your lender about the reason and whether there are steps you can take to strengthen your finances before applying for a mortgage again.

How to Strengthen Your Mortgage Application

Improving your financial picture is the best way to meet underwriting requirements for loan approval. Taking the following steps will help qualify you for a mortgage at the most competitive rates. 

• Maintain stable employment and income: Consistent, verifiable income can help demonstrate your ability to repay your mortgage. Changing jobs doesn't necessarily prevent you from qualifying, but employment or income changes during underwriting may require additional documentation.
• Limit new debt and credit inquiries: Taking on new debt or credit inquiries is a red flag to lenders that you may be borrowing more than you can afford. Try to avoid additional borrowing when you’re applying for a home loan.
• Consider your down payment: A larger down payment can lower your LTV and reduce the amount you need to borrow. However, down payment requirements vary by mortgage type, and you may qualify with significantly less than 20% down.
• Organize your financial documents early: Preparing and submitting them promptly for review can help you avoid delays in the underwriting process. 

Mortgage Underwriting FAQs

If you‘d like to know more, here are the answers to some frequently asked questions about mortgage underwriting. 

What Is the Difference Between Preapproval and Underwriting Approval?

Preapproval is a preliminary process in which you provide some financial documents to determine if you’re likely to be approved for a home loan. Underwriting is a comprehensive, formal process in which your finances and the home appraisal are reviewed in greater detail to determine whether you meet the requirements of the mortgage you applied for.

Can I Get Denied for a Mortgage After Being Conditionally Approved?

Yes, you can be denied for a mortgage after being conditionally approved. This could occur if your employment situation changes, if the home doesn’t appraise for the expected amount, if you take on too much new debt, or for any reason your loan is no longer in compliance with the lender’s maximum loan-to-value ratio (LTV) or other qualifying guidelines. 

What Are Common Red Flags That Cause Underwriting Denial?

Common red flags that cause underwriting denial include negative information on your credit report, taking on too much new debt, sudden drops in income, and unexplained or undocumentable income or assets.

Final Thoughts: Understanding the Mortgage Underwriting Process

The mortgage underwriting process is a key part of the homebuying process that every buyer must complete if they’re taking out a mortgage. Waiting for approval can be somewhat nerve-wracking, but if you’re prepared and ready with your documents and have solid financial credentials, it should be a simple process.

To get started with buying your dream home, reach out to Freedom Mortgage to begin your prequalification today.