What Is the Mortgage Underwriting Process?

How Does the Mortgage Underwriting Process Work?

The mortgage underwriting process is a key step in the mortgage application process. Here’s where it fits into the process, and what’s involved. 

1. Preapproval

When you first apply for a mortgage, you will likely go through the prequalification process or preapproval process. The prequalification process involves providing some basic financial details to get an idea of how much you can borrow and at what rates. 

Pre-approval is a more formalized process that requires you to submit financial documentation to get a preliminary approval for your loan. At this phase, though, your financial information gets mainly a preliminary review.

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 to verify that you have the assets for your down payment and closing costs and to prove you have the necessary income to afford your monthly mortgage payment. 

3. Automated and Manual Underwriting Review

Once you have 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 is used to review your financial details and determine if you’re approved for a loan. Many lenders offer an automated preapproval process, and some are transitioning to a fully automated underwriting process for final approval, at least in straightforward situations. 

• 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 still use manual underwriting, especially in more complicated situations such as being self-employed or having unusual income sources. 

4. Property Appraisal

A home appraisal is a key part of the mortgage underwriting process because the home is the collateral guaranteeing the loan. Lenders must verify the home’s value enough to qualify for a mortgage. 

During the appraisal, a professional appraiser compares your home and its features to homes that sold recently in your area. The goal is to determine the likely market value of your home. 

An appraisal can help you avoid paying more than a home is worth and ensures the house could sell for enough to repay your loan if you stop making payments. 

5. Property Title Search 

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

If the title shows that there are ownership disputes or outstanding liens (claims on the home), this will impact whether the home qualifies as collateral for the loan. 

6. Final Approval and Closing Disclosure

Finally, you will get final approval for the loan once underwriting has verified your financial situation and the value of the home. 

You will receive a Closing Disclosure detailing the money you’re required to pay to close your mortgage and your loan terms. 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. 

Special Considerations for VA and FHA Loans

Both VA and FHA loans are loans guaranteed by the government. They are alternatives to conventional loans that have more relaxed approval guidelines. 

• VA loan underwriting: VA loans don’t have a government-mandated minimum credit score, but many lenders require a score of 620 or higher. Freedom Mortgage allows VA loan approval with a credit score as low as 550. You also do not need a down payment with a VA loan. 

• FHA loan underwriting: FHA loans allow you to qualify for a loan with a credit score as low as 500 with a 10% down payment, or 580 with 3.5% down. 

How Long Does Mortgage Underwriting Take? 

There’s no standard turnaround time for how long the mortgage underwriting process lasts. You can, however, help speed things up by providing all information as soon as possible. 

What Can Cause Underwriting Delays?

Many different factors could delay the underwriting process and cause a longer  mortgage loan approval. Some of those factors include the following. 

● 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. 

How to Improve Your Chances of Approval

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

● Maintain stable employment and income: Steady income from the same employer is preferred by lenders as there’s a reduced chance of your income dropping.

● Limit new debt and credit inquiries: Taking on new debt 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.

● Save for a larger down payment: A larger down payment reduces the risk to a lender since you have more collateral in the home. Aim for at least 20% down to get the most competitive rates.

● Organize your financial documents early: Preparing all your financial documents and providing them quickly for review can help you avoid delays in the underwriting process. 

Mortgage Underwriting FAQs

If you still need to know more, here are the answers to some frequently asked questions about mortgage underwriting. 

What Does a Mortgage Underwriter Do?

A mortgage loan underwriter is the person who reviews your mortgage application and decides whether you qualify for the mortgage. A mortgage underwriter bases their decision on your credit history, income, and overall financial situation in relation to mortgage qualifying guidelines. 

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 are likely to be approved for a home loan. Underwriting is a more comprehensive formal process where your finances and the home appraisal are reviewed in more detail to determine if 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 does not appraise for the expected amount, if you take on too much new debt, or any reason your loan is no longer in compliance with the lender’s maximum loan to value ratio or other qualifying guidelines. 

What Are the Most 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 income or assets.

Final Thoughts: Understanding the Mortgage Underwriting Process

The mortgage underwriting process is a key part of the home buying process that every buyer getting a loan must complete. If you’re prepared and ready with your documents and have solid financial credentials, it should be a simple process.

To get started and begin moving forward on buying your dream home, reach out to Freedom Mortgage to start your prequalification today.