The Mortgage Underwriting Process: What You Need to Know

19, May, 2023

Finding the home of your dreams is definitely an exciting time, but many homeowners dread the mortgage underwriting process. That being said, lenders rely on it to assess your financial readiness for a home loan, so the more you understand it, the easier it will be. Learn everything you need to know about mortgage underwriting process, from pre-underwriting documents needed to how long the process takes and roadblocks you could encounter.

Pre-Underwriting Mortgage Process

Pre-underwriting refers to the preliminary process in which a lender examines your current financial situation. Borrowers will complete a mortgage application, but instead of going through the underwriting process directly, a junior underwriter or another member of the loan team will examine your documents for any red flags that may prevent you from receiving a loan.

Importance of Pre-Underwriting

Underwriter explains the mortgage underwriting process

The pre-underwriting process identifies problems in your loan application that could prevent you from receiving a loan while also ensuring that you’re able to afford the current market value of the home. Not all lenders will require pre-underwriting, but it can be especially helpful in a tight market. Additionally, by eliminating red flags, the official underwriting process will run much more smoothly, saving you time.

Documents Needed for Mortgage Pre-Underwriting

The types of documents you will need for the pre-underwriting process are as follows:

  • Tax returns from the last two years
  • Bank statements from the past 60 days
  • Pay stubs
  • Statements regarding retirement/brokerage accounts
  • Records of rent payments
  • Current credit report(s)

Junior underwriters may also look at other financial and legal documents, such as divorce decrees or statements of debt, so the more information you can provide, the more you can have confidence in your ability to receive final approval on your loan.

The Mortgage Underwriting Process Steps

Not all lenders will require a pre-underwriting process, but every borrower will have to go through the underwriting process in order to secure a home loan. That being said, here is the mortgage underwriting process, explained in greater detail:

1. Criteria Used During Underwriting

Underwriters will examine the following financial criteria when evaluating your loan application:

2. Credit Score And Credit History

Lenders will pull your credit report to examine your credit history. The higher your credit score, the better your chances of securing adequate interest rates and loan terms.

3. Employment History

Mortgage lenders want to ensure that you have the income to make your mortgage payments. Underwriters may ask for things like pay stubs, W-2s, or 1099s to verify your work history.

4. Debt-to-Income Ratio

Your debt-to-income ratio is that which exists between your income and your outstanding debts. If your monthly income is $5,000 and your total debts are $1,500, for instance, you have a debt-to-income ratio of 30%.

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Assets and Reserves

In addition to the above, lenders will also look for assets and reserves that you can tap into in the event you default on your loan. Underwriters may check your savings account, stocks, real estate, or personal property.

Timeline: How Long Does Mortgage Underwriting Take?

The duration of the underwriting process varies on a case-by-case basis. For some borrowers, loan approval can happen in a matter of weeks, though others may wait longer. As such, it helps to go through a pre-underwriting process, as doing so can ensure that any impediments are addressed so they don’t cause any delays.

Common Underwriting Challenges

Here are some of the most common challenges that can cause problems in the underwriting process – and how to address them to ensure you secure a loan for your dream home:

  • Debt-to-Income Ratio Issues: Most lenders expect you to have a debt-to-income ratio below 43%. If your underwriter is unsure if you have the cash flow to make your mortgage payments, you may not receive approval on your loan.
  • Employment History Issues: Not every mortgage applicant will have the documentation necessary to verify their employment history. Self-employed professionals won’t necessarily have traditional pay stubs, which can make it hard for underwriters to evaluate their overall financial situation.
  • Credit History Issues: Low credit scores can jeopardize your eligibility for a home loan, but so too, can other credit history issues. Opening too many credit cards or having a history of late payments can cast doubt on your ability to meet future financial obligations, such as your monthly mortgage payments.

Ways to Overcome Underwriting Challenges

None of these challenges are insurmountable. You can address many of these issues through the following methods:

  • Pay down credit card debt to adjust your debt-to-income ratio.
  • Provide other financial documents to verify your employment history.
  • Check your credit report and correct any errors that may lower your score.
  • Offer an alternative credit history that includes rent payments or other data.
  • Be upfront and honest about your income and asset information.
  • Don’t make any major financial changes, like applying for a new credit card.

Also, you may hear from your lender throughout the underwriting process. They may request additional information or documentation to speed up the process, so make sure you respond quickly to these requests to keep the process moving forward.

The Mortgage Processor

Mortgage processors go by several names – loan processors, mortgage originators, etc. – but they all play an essential function: assembling, reviewing, and processing your loan documents prior to final underwriting and approval.

In other words, a mortgage processor administers the steps of underwriting to ensure a smooth process from application to closing. They do not actually perform the underwriting process, but they will ensure that your application documents are properly assembled to avoid complications.

What Happens After Underwriting?

Assuming everything goes smoothly, you’ll be cleared to close. You’ll receive a document known as a “closing disclosure,” which outlines the terms of the loan, including:

  • Amount of the loan
  • Interest rate
  • Estimated monthly payments
  • Closing costs

You’ll receive the closing disclosure document at least three days prior to your closing date. Keep in mind that it’s only now that your loan amount becomes final, and it may have changed slightly from any pre-approval you previously received.

Potential Outcomes of Underwriting

The underwriting process can yield several outcomes:

  • Mortgage approval (sometimes called “clear to close”)
  • Denial
  • Conditional approval

Conditional approval means that you will receive the loan but must first provide additional documentation to the underwriter. They may request additional pay stubs, marriage certificates, or other documents to verify your financial details, but once they have these items, you’ll receive your loan.

Timeline for Closing

Upon approval, the timeline of the closing process becomes a bit more predictable. Between final underwriting and clear-to-close is a period of at least three days, during which you’ll have an opportunity to conduct a final walkthrough before closing day. If you received conditional approval, it might take a week or longer before you’re clear to close, though this depends on how readily you can provide the requested documentation.

Find Mortgage Options that Fit Your Goals

Now that you’ve had the mortgage underwriting process explained, you’ll be better equipped to apply for a mortgage of your own.

Our experienced team can help you explore your financing options, connect you to programs that are ideal for first-time buyers, and provide you with the type of loan that fits your goals as well as your budget. Learn more by contacting a local loan officer today.

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