What Is Mortgage Underwriting? Explaining The Underwriting Process

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Buying a home is an exciting, big step. You’ve found a house and evaluated lenders to determine the right mortgage for your home purchase. The next step is the mortgage underwriting process. This formal application process begins after you agree to the loan estimate and indicates your intent to proceed

After you choose a home, the underwriter reviews all of the supporting documentation to make sure you meet all of the appropriate lending standards to qualify for the mortgage. 

But the pandemic economy and accompanying rise in unemployment has left lenders scrambling and nervous, and the underwriting process has gotten a bit more complicated, even if you were already preapproved.

Standards are continually changing because lenders are worried borrowers will default on their loans. JPMorgan Chase, for example, changed its mortgage underwriting standards. As of early April, the lender requires a FICO credit score of 700 and a 20% down payment for new applicants. 

Chase is not the only lender to shift gears. Fannie Mae, Freddie Mac, and Ginnie Mae have changed their underwriting guidelines as well. They now require asset and income paperwork to be dated within 60 days versus the former 120-day guidance. 

United Wholesale Mortgage, the second-largest lender nationally, is now requiring employment verification on the day of closing to prove employment throughout the process. 

Especially with these changes, it is important to understand how the overall underwriting process works. 

How Does the Mortgage Underwriting Process Work?

The primary purpose of mortgage underwriting is to make sure both you and the property meet the loan’s standards. In other words, the underwriter approves or denies your application — and can sometimes offer an in-between verdict of approval with conditions.

One of the main criteria an underwriter looks at is your financial information, such as your employment history, assets and liabilities, and your credit history. “In general, the underwriter looks for a sufficient debt-to-income ratio, credit score, and assets,” says Jason Lerner, vice president at George Mason Mortgage, LLC, based in Fairfax, Virginia. “If those boxes are checked, everything should be fine.”  

You’ll be responsible for submitting several pieces of financial documentation. Pay stubs, for example, help the underwriter confirm your income, while bank statements ensure you have enough assets to cover a down payment and closing costs. While your loan officer may have done a preliminary credit check during the prequalification or preapproval process, the underwriter will do a full credit check to confirm your eligibility for approval and your quoted interest rate.

Three days before closing, your lender provides you with a closing disclosure, which outlines your final loan terms, monthly mortgage payments, and total costs.

Automated underwriting vs. manual underwriting

Automated underwriting is a common way that lenders expedite mortgage approvals. This process automatically approves people who meet the lender’s preferred credit profile, as determined by a computer algorithm. People with high credit scores and a history of using credit responsibly will benefit the most from automated underwriting, while those who fall under the threshold will either be rejected or given a closer look through manual underwriting. 

Manual underwriting is when a human reviews the financial information provided in your application. It’s more time-consuming and requires you to provide more documentation. But it may be beneficial for those who are “borderline” (e.g., people who are new to credit or have no credit). If some parts of your application could use work, you may be able to compensate by putting up a larger down payment or proving you have lots of savings.

What Mortgage Underwriting Will Look At

Credit history/score: Your credit history demonstrates how likely you are to repay your mortgage. It also impacts the interest rate you’re eligible to receive.

Prequalification: This happens before the underwriting process. Your lender uses the information you give verbally to give you an idea of what kind of loan terms you qualify for. 

Appraisal: An appraisal confirms the home’s value and must be at least much as the sales price. In light of the COVID-19 pandemic, many appraisals are being done as drive-bys or being waived completely, especially for refinancing.

Debt-to-income ratio (DTI): A lender compares your monthly debt obligations to your monthly income, including your new mortgage payment. DTI limits vary by lender but could be as high as 50%.

Employment history: Traditionally, lenders would verify your employment over the phone within 10 days of closing. Because jobs are so volatile right now, the time frame is now five business days before closing, or sooner, such as the day of closing. Lenders are also allowing email confirmations since many employees are working remotely. 

Income verification: You’ll need to provide pay stubs to prove your income is stable. Expect to be asked for your most recent pay stub during underwriting. As mentioned above, some lenders are looking for more recent proof of income documents. 

Mortgage type: Different mortgage programs come with different requirements for things like credit score, debt-to-income ratio, and even the condition of the property. 

Approval/denial outcome: An approval may still require you to submit some additional documentation to the underwriter, like a letter of explanation for something like a large cash deposit. If you’re denied, ask your lender why so you can rectify the situation, whether it’s improving your credit score or paying down unsecured debt.

How Long Does the Mortgage Underwriting Process Take?

“In normal times, a purchase should close within 30 to 45 days from the time of contract,” says Jared Maxwell, vice president and direct sales division leader at Embrace Home Loans, located throughout the East Coast. However, low mortgage rates have caused a flurry of activity. 

Closing time should actually be one of your criteria for evaluating a lender. “Many lenders have taken steps to control the amount of business that we want and are able to take in,” Maxwell explains. Those who have not, however, may have slower underwriting periods.

It’s also important to avoid incurring any new debt during the underwriting process, whether through a credit card, a new auto loan, or anything else. “If they see five inquiries with auto finance companies, you’ll have to write a letter of explanation on what the inquiries were for and if you obtained new credit,” says Maxwell. “And if you did, you’ll need a new debt-to-income calculation.” In other words, new credit can both delay and derail the underwriting process.

Pro Tip

Typical closing takes 30 to 45 days. When evaluating which lender to go with, take into consideration which lenders can handle the influx in business. Since rates are low, you could be waiting longer for your closing if that lender is not equipped to handle the new volume.

What Can You Do to Make the Process Easier and Faster?

“Things that slow down the process are either a lack of promptness from the buyer or a lack of communication from the lender on what’s needed,” Lerner says. 

  • Gather necessary paperwork. Start gathering bank statements, tax forms, and pay stubs during the house hunt for a truly expedited process. Respond promptly when your loan officer requests additional information for the underwriter. 
  • Confirm what systems your lenders will use to assess your application. You can ask your lender if it uses online systems to automatically verify your employment and assets, according to Matt Hackett, operations manager at Equity Now, based in New York City. “If someone is technologically savvy, it’s easy to go on the lender’s portal,” he says. “With authorization, we can order reports that oftentimes take the place of income documentation like pay stubs and W-2s.”
  • Keep in contact with your loan officer. Hackett also recommends keeping an open line of communication with your loan officer about employment, especially in the current economic environment. Lenders now check your job to see if it’s considered an essential service. If it’s not, they may do more frequent checks throughout underwriting to make sure you haven’t been furloughed or laid off.

“As a home buyer, you’re required to report a status change to your employment,” Hackett says. “But it’s easier if people are transparent and up front if they have any relevant information; plus they feel more control of the process.”

Even if you’re not an essential employee but have been working from home successfully or know your company is operating normally, tell your lender, so you both know there’s a strong chance of your loan getting approved.

The Bottom Line

The mortgage underwriting process gives you final approval for your home loan to close and finally move into the home of your dreams.  

As a result of the pandemic, underwriting guidelines have tightened and may continue to change. Since no one knows for sure when, and if, the economy will go back to normal, don’t let that stop you from taking steps to buy a new home. 

Your chances of success for this process largely depends on you, the borrower. You can expedite underwriting with timely responses to any questions from your lender. Get a head start by gathering your financial documents in advance, paying close attention to your credit report, and working on any negative credit habits to improve your chances of approval.