What is mortgage underwriting?

Mortgage underwriting is the process mortgage lenders go through when deciding whether a mortgage applicant is a good bet as a borrower.

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What does a mortgage underwriter do?

An underwriter analyzes the information on your application form. They then check that your claims about your financial situation are accurate using your supporting documentation and third-party checks. And, finally, they decide how likely you are to repay the loan amount in a responsible way. On that basis, your application may be approved, approved with conditions, denied or suspended.

Today, many lenders today use algorithms running on sophisticated IT systems to do most of the work of evaluating potential home buyers. The program asks the same questions as a human underwriter but determines answers more quickly.

What steps does the mortgage underwriting process include?

The whole process comprises the following nine steps. You will typically:

1. Complete your mortgage application
2. Get prequalified
3. Find your new home
4. Enter the underwriting system
5. Receive the underwriting decision
6. If that’s a conditional approval, meet those conditions
7. Get confirmation that you’ve met any conditions with a second round of underwriting
8. Sign closing documents
9. Receive funding and close

We’ll explore these steps more below.

1. Complete your mortgage application

You fill in the form, either online or on paper. But it’s worth paying special attention to a few things.

First, every material claim you make is going to be checked and verified. So avoid lies, spin or “truthful hyperbole.” It’s very likely this will get you into trouble later.

And the consequences can be serious: At best, the lender may decide not to deal with you. But, at worst, if it thinks your claims constitute fraud, you could find yourself in federal court and possibly facing large fines and prison time.

The second point is you may be asked to submit supporting documentation proving your claims in short order. And your document checklist at a minimum might include the following proofs:

1. Identity and residence.
2. Income. Most recent pay stubs, W2s and tax returns.
3. Assets. Most recent statements for checking, savings, 401k and brokerage accounts.
4. Other information. Divorce, alimony and child support papers; business licenses if you’re self-employed; a letter detailing any exceptional circumstances.

It’s a good idea to pull these documents together before you apply. That way, you won’t delay your underwriting, scrambling around trying to find stuff.

2. Get pre-qualified

You don’t have to complete this step but the advantages are so great you almost certainly will want to.

A pre-qualification letter from a lender tells sellers and real estate agents that:

1. The lender has agreed in principle to lend you up to a specific amount
2. The lender has verified the information on your application in an initial underwriting process

Having such a letter gives a buyer much more leverage when negotiating a home purchase.

True, you’re not quite as desirable as a cash buyer. But you’re the next best thing. And you’re way more attractive to sellers and agents than others bidding for a home, any of whom could be ill-prepared with zero chance of getting a loan.

Note that pre-qualification is different from — and better than — pre-approval. Pre-approval letters are offered wholly on the basis of your claims in your application. Besides glancing at your credit score, the lender’s made no checks or verifications. A pre-qualification, though, documents and verifies your income, assets, and other parts of your profile. So a pre-approval letter carries much less weight.

3. Find a home

This is the fun part — especially if you have a pre-qualification letter in your pocket. Once you find your dream place you can make an offer.

Your offer should include a “contingency” that your lender will come through with your loan. A contingency is simply an escape clause that lets you exit the deal if that part of your plan doesn’t turn out.

Note that pre-qualification is different from — and better than — being pre-approved. Pre-approval letters are offered wholly on the basis of your claims in your loan application. Besides glancing at your credit score, the lender’s made no checks or verifications of your financial information. A pre-qualification, though, documents and verifies your income, assets, and other parts of your profile. So a pre-approval letter carries much less weight.

Ready to shop for a home? Start here.

4. Enter the underwriting system

If you’ve already pre-qualified, then you’ve already been through the underwriting process. But, if it’s been a while since you received your pre-qualification letter, expect to have to provide more recent versions of many documents.

And the underwriter’s review of your affairs may be deeper, especially if you’re not a straightforward borrower, meaning an employee with simple and organized finances.

We mentioned earlier that many underwriting exercises are now carried out by algorithms with little human oversight. But those can be tripped up by applicants with complicated finances. If that sounds like you, see if your lender will agree to a “manual underwriting,” which is one carried out by a person.

5. Receive the underwriting decision

There are four standard underwriting responses to your application:

1. Declined. The lender can’t or won’t help you.
2. Approved. You’re in!
3. Approved with conditions. See below.
4. Suspended. Your whole application is stalled until you can satisfy the underwriter’s concerns.

If you are a declined applicant, you can comparison shop for different, more sympathetic lenders. With the last two, you have to take rapid action to get past the problem. Only #2 (loan approval) lets you relax.

One last thing. Underwriting continues right up until you close. And lenders routinely carry out credit checks in the days leading up to closing.

So don’t open a new credit account to buy furnishings or run up your credit card balances before you have your loan. You risk running up your credit balances and having your offer amended to a higher rate — or even pulled — just when the end is in sight.

6. If it’s a conditional approval, meet those conditions

This is very common and no reason for panic.

But it needs to be taken seriously. You must meet the conditions imposed (perhaps additional documentation or explanations of circumstances) before you can close.

Some common underwriting conditions include:

1. One additional pay stub
2. Letter of explanation regarding the non-sufficient-funds fee on the checking account
3. Supply pages 9 & 10 of the October bank statement

Some conditions are simple and some are more difficult.

Don’t just assume everything will be alright in the end. And it’s best to respond promptly. Work with your loan officer to quickly answer every query and provide any additional information your underwriter requires. That way, if your responses raise more issues, you have time to address those while keeping your closing date on track.

Get started on your pre-approval process today.

7. Get confirmation you’ve met any conditions in a second round of underwriting

Moving from conditional approval to full mortgage approval involves a second round of underwriting. Your loan officer should work with you closely during this time — especially since they won’t be paid until you close.

8. Sign closing documents

Wherever you sign your closing documents, they need to be notarized.

The COVID-19 pandemic has accelerated an existing trend toward remote notarizations. So you may be allowed to have a notary visit you at home and sign more safely on your porch or in your garage with the door open.

And both lenders and state laws are increasingly willing to let borrowers use remote, online notarizations. But you’ll need decent internet service and a videoconferencing application (many are free) to do that.

9. Receive funding and close

This typically happens very soon after you’ve signed your documents. Your lawyer or an escrow company receives the proceeds of your home loan and sends it to the seller. The deal closes and the property is yours.

Start your home buying journey here.

How long does mortgage underwriting take?

With mortgage underwriting, every case is different and the amount of time it will take for final approval is variable.

If your case is very straightforward, you could be looking at a couple of days — perhaps even less with an automated, algorithm-based underwriter.

But if your approval is suspended or comes with conditions, underwriting could stretch out over several weeks. Much depends on how quickly you respond to questions and provide documentation.

5 tips to help your underwriting process go smoothly

Here are five things to do to make your mortgage underwriting process as quick and painless as possible:

1. Be honest on your application. Lies cause delays. And possibly worse.
2. Get all your supporting documentation ready before you first apply. When you submit it, include every page of every document, even blank ones.
3. Respond promptly to every query from your lender.
4. Write a letter or letters explaining every discrepancy. The source of any unexplained large deposits to your bank account, perhaps. Or why you were late with your auto loan payment three years ago.
5. Don’t take on new debts before you close. They’re likely to appear on your credit report — pushing down your credit score and your critical debt-to-income ratio.

An essential job requirement for underwriters is that they be detail-oriented. They’ll insist on dotting every “i” and crossing every “t”. So don’t expect them to shrug and move on over what you regard as a minor point.

If you anticipate their needs when you can and respond swiftly when you can’t, things will go much more quickly and easily. And everyone wants that — even the underwriter.

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