The mortgage underwriting process

Here are the most common questions about the mortgage underwriting process:

  • What is underwriting?
  • What does the underwriter do?
  • How long does the process take on average?
  • Can my loan be turned down during the underwriting process, even though I’ve been pre-approved by the lender already?

How it works, and how long it takes

  • Definition of Mortgage Underwriting

    Definition of Mortgage Underwriting


    Mortgage underwriting is a process through which lenders:


    1) Measure the risk associated with a certain loan


    2) Ensure that the loan complies with the lender’s minimum guidelines


    It is the underwriter’s job to determine if the risk of lending to a particular borrower is acceptable. He/she does this by examining the borrower’s credit score, debt-to-income ratios, employment and income documents, and all other financial documents included in the loan package. During this process, the underwriter will ensure that the borrower meets the requirements set forth by the lender, as well as the requirements of the federal government and the secondary mortgage market, if applicable.


    In addition to using their own internal guidelines, most lenders adhere to the underwriting guidelines established by Fannie Mae and Freddie Mac. Their goal is to generate “conforming loans” (i.e., loans that conform to Fannie Mae’s and Freddie Mac’s guidelines), as these loans can be sold into the secondary mortgage market.

  • What the Underwriter will do

    What the Underwriter will do


    Review your credit history.

    This includes an investigation of:


    • Your credit report
    • Credit score
    • Payment history

    Apply institutional standards, such as Fannie Mae’s guidelines which require that all borrowers have: 


    • Maximum loan-to-value (LTV) ratio of 97 percent
    • Credit score of 640 or higher
    • Maximum debt-to-income (DTI) ratio of 36 percent

    However, the lender may supplement these with its own criteria.


    Consider other factors 

    If you fall short in one of the above areas, an underwriter may still recommend approval for your loan based on other considerations, such as:


    • Your financial reserves (investments, assets, savings). (For instance: If you have a lower credit score but a substantial amount in savings, you may still get approved).
    • If the property is an income-producing property - whether you will occupy it.

    Order a property appraisal 

    n large part, your loan approval depends on the loan amount the appraised value of the property which you are purchasing or refinancing.

  • 5 stages of the underwriting process

    5 stages of the underwriting process


    The underwiring process can take some time. 

    Each lender utilizes slightly different methods, but the five major stages are:


    • Preapproval
    • Income and asset verification
    • Appraisal
    • Title search and insurance
    • Making a lending decision

  • How long does it take?

    How long does it take?


    This will vary quite a bit since each applicant is different. Underwriting can take anywhere from a few days to a few weeks. One to two weeks is pretty common. However, considering all of the various conditions that can arise during the underwriting process, it is understandable why there is so much variance.


    • Some borrowers have no conditions and sail through the mortgage underwriting process in a matter of days.
    • Some borrowers have one or two conditions, which must then be addressed and “cleared” prior to the proceeding to the closing stage. This can add a few more days onto the process.
    • Other borrowers have a long list of conditions. This is where the loan process can slow down (sometimes for two weeks or more). It also depends on how quickly the borrowers can provide the requested items (additional documents, letters of explanation, etc.).

    As you can see, there are many variables that affect both the length and difficulty of the mortgage underwriting process.

  • What happens after Underwriting?

    What happens after Underwriting?


    If the underwriter determines that the loan is an acceptable risk based on the lender’s guidelines (and it conforms to other external requirements, such as FHA, VA, Fannie Mae, or Freddie Mac), he/she will move the file forward to “Clear to close” status.


    At this point, the mortgage underwriting process has been cleared, and the transaction can move forward towards closing escrow.


    At this stage, the lender will prepare the final loan documents package which will be sent to the escrow or title company who is managing the closing and, they will then prepare any additional required documents that will need to be signed along with the loan documents.

The mortgage underwriting process will generally produce one of the following outcomes:

Approved

When all of the borrowers paperwork has been reviewed and accepted, verifications of employment, and other verifications have been completed, and the financial risk of extending a loan is deemed acceptable – the loan is considered approved and no other conditions are necessary.

(This is not quite common)

Approved with conditions

Also known as “Conditional Approval” – This means that a loan is approved. However, there are still additional conditions that must be met prior to issuing a final loan approval.
Additional conditions may be, but not limited to: additional paycheck stubs, employment re-verification, additional bank statements, letters of explanations for certain items, property title clearance, etc.
 
The underwriter will review the additional documents and/or explanations provided by the borrower, and then do one of three things:
(1) Clear the loan for closing.
(2) Give the borrower additional follow-up conditions.
(3) Reject the loan for some reason.

Suspended

Without all the proper documentation, missing information on the loan application, not being able to verify information, or a changed circumstance, the underwriter is unable to thoroughly evaluate the loan application package, therefore placing the file in suspense status.


At which point, the underwriter will ask the borrower to provide additional information for further review in order to clear the condition(s) in question. Or if denial is based on having to switch loan program, the underwriter will inform borrower of the new program to see if borrower would like to proceed.


If all provided information is acceptable to the underwriter, the loan application will be reactivated and the loan process will proceed towards approval status.

The loan file can be suspended for several reasons such as:

  • The loan application is incomplete.
  • The Underwriter is unable to verify employment.
  • The Underwriter is unable to verify assets.
  • Borrower’s income or work hours have been reduced.
  • Borrower incurred additional debt since first applying for the loan.
  • Borrowers credit score dropped since first applying for the loan and no longer qualifies for the loan program requested so the loan has to be restructured under a new loan program.
  • The loan file needs to be restructured for other reason.

Denied

A loan may be denied for some reason or another as determined by the underwriter.
At this point, there is not much the borrower can do, other than perhaps apply for a loan elsewhere or address the items that led to loan denial.

Some reasons for a denial are: Lower credit score, monthly debt payments, increased monthly debt or decreased monthly income due to cut in pay or reduced work hours, etc.


If the items in question pertain to things which are at the control of the borrower, such as: lower credit score, high debt account balances, not enough cash reserves, the borrower should address these issued by paying down as much debt as possible, therefore increasing the credit score, and saving additional money.  This will demonstrate a stronger borrower profile and will improve the chances of being approved for a loan next time.

The best thing that borrowers can do during the mortgage underwriting process is:


1) Stay in touch with the loan officer

2) Resolve any conditions that may arise as quickly as possible