How does mortgage loan underwriting work?

Written by: Janet Berry-Johnson, CPA
• Updated •6 min read
This date may not reflect recent changes in individual terms.
Man sitting on his couch at home, reading on his tablet about loan underwritingImage: Man sitting on his couch at home, reading on his tablet about loan underwriting

In a Nutshell

Loan underwriting is a process lenders use to determine how risky you are as a borrower and whether they’re willing to lend you money. Underwriting requirements vary by lender, but knowing what to expect and how to prepare can improve your chances for approval.
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How do you get from finding the home you love to move-in day?

Part of the homebuying process involves mortgage loan underwriting. Loan underwriting is what happens behind the scenes after you submit a loan application. The underwriter is a person who takes an in-depth look at your credit and finances to decide whether you’re eligible for a loan according to the lender’s unique guidelines.

What is loan underwriting?

Loan underwriting is a process that lenders go through to decide whether to offer credit — and how much — to a particular borrower.

Each lender or loan program has minimum requirements that the loan underwriter bases decisions on. Any time a bank or lender makes a loan, it takes on some level of risk. Loan underwriting helps ensure that the lender makes a sound judgment about an applicant’s ability to afford the loan and its monthly payments.

Are the underwriting rules the same for all home loans?

Approval requirements differ from lender to lender and program to program.

For a home loan, some of the factors a mortgage underwriter considers might include the following:

  • Assets — The underwriter must confirm that you have the income and sometime other assets (such as savings) to afford the loan.
  • Credit history — Lenders pull credit reports and credit scores from one or more of the three major credit bureaus and review them for things like payment history and amounts owed. They can also check to see if you have any recent bankruptcies or foreclosures.
  • Debt-to-income ratio — An underwriter may calculate your debt-to-income ratio by dividing your monthly debt payments (including the new mortgage payment) by your monthly income before taxes. This helps the underwriter determine whether you can afford to make the mortgage payments and other obligations.
  • Employment history — Lenders tend to prefer loaning money to people who have a stable employment history.
  • Income — The underwriter may review your pay stubs, W-2s, recent tax returns and other documents to confirm that the income you reported on your mortgage application is accurate.
  • Loan-to-value ratio — The underwriter divides the mortgage amount by the sales price or appraised value of the home to determine the loan-to-value ratio. Typically, if your LTV is higher than 80% on a conventional mortgage, you’ll have to pay private mortgage insurance, or PMI, in addition to your mortgage. PMI is an insurance policy that protects the lender if you default on your mortgage.

Understanding lender overlays

Different types of mortgages, including conventional mortgages and those guaranteed by the Federal Housing Administration, U.S. Department of Agriculture or Department of Veterans Affairs, have their own varying underwriting standards.

In addition, the lenders that make these loans may have their own requirements. These lending requirements are called lender overlays. They’re an additional set of more restrictive requirements that lenders add to the existing requirements of Fannie Mae, Freddie Mac, the FHA, VA or USDA to offset risk.

One of the most common lender overlays involves your credit scores. For example, according to FHA loan guidelines, borrowers must have credit scores of at least 500 to qualify for FHA-insured financing. But an individual bank or lender may have a lender overlay requiring higher credit scores.

Other potential lender overlays include …

  • Maximum loan-to-value ratio
  • Maximum debt-to-income ratio
  • Minimum number of credit accounts and years of credit history
  • Minimum employment history
  • Restrictions on the types of property eligible for a mortgage
  • Waiting periods after a bankruptcy
  • Cash reserves
  • No unsettled or delinquent debts on your credit report

What to expect from the loan underwriting process

While underwriting requirements vary by lender, loan underwriting usually follows a standard set of steps. Here’s what you can expect from the mortgage underwriting process.

Step 1: Apply for a mortgage

You may be asked to fill out a mortgage application online, over the phone or in person, depending on the lender. When you apply for a mortgage, you give the lender permission to check your credit and review your personal and financial information.

Step 2: Provide proof of income, assets and debts

In addition to filling out a mortgage application, lenders require you to provide documents to verify the information included on the application. This can include …

  • Pay stubs, W-2s and 1099s
  • Copies of recent tax returns
  • Financial statements for any businesses you own
  • Copies of any lease agreements
  • Bank statements and statements for investment accounts and retirement accounts

Depending on the lender’s requirements and your unique financial situation, you may have to provide additional documents, such as a copy of your divorce or separation agreement, proof of sale for your prior home and more.

Step 3: Order an appraisal

The lender will typically order an appraisal by a state-licensed or certified appraiser. The purpose of the appraisal is to confirm the property’s market value and verify that it works as collateral for the mortgage.

Lenders may also hire a title company to perform a title search. The title company searches public records to confirm that the seller has a legal right to sell the property, and there are no judgments, liens, unpaid taxes or other issues with the title that would prevent the seller from transferring a clear title.

Step 5: Await the underwriter’s decision

Once the underwriter has all the necessary information, they’ll compare it to their underwriting guidelines and decide whether to approve the loan. The entire process can take from a few days to several weeks, depending on your financial situation, the type of loan you’re applying for and how long it takes to complete the appraisal and title search.

The time it takes for a decision also depends on whether your application qualifies for automated underwriting or has to go through manual underwriting. Automated underwriting means a computer algorithm automatically approves people (or not) based on the lender’s preferred criteria.

If you don’t meet the lender’s preferred criteria, your application may be referred to manual underwriting. This means a human then reviews your financial information and decides whether you can qualify for a loan. Manual underwriting typically takes longer.

If you’re not approved — or the amount is different than you expected — you’ll want to understand why so you can have a better chance if you apply again in the future or with a different lender.

What’s next?

When you’re ready to buy a home, you want the loan underwriting to go smoothly so you can close your loan on schedule. Here are some tips to improve your experience.

  • Check if your finances are ready to buy a house. Start by reviewing your credit scores and ordering a free copy of your credit reports. Review the reports for potential issues. If you find any errors that might be dragging your credit scores down, follow the credit bureau’s steps to dispute the errors on your credit reports. Save up for a down payment, and pay down credit cards to improve your debt-to-income ratio.
  • Get prequalified for a mortgage. A mortgage prequalification gives you an estimate of how much of a mortgage you might be approved for, based on your credit scores and basic information about your finances.
  • Figure out how much home you can really afford. The amount you get approved to borrow for a home may be more than is healthy to take on. Try using a home affordability calculator to get an idea of what’s truly within your means.
  • Respond quickly to requests from the underwriter. The underwriter may call or email you to request more information or additional documentation during the underwriting process. Respond to any requests promptly to keep your loan application moving.

Want to learn more? Check out some of our top mortgage lenders for first-time homebuyers.

  • Homebridge Mortgage: Homebridge offers resources that specifically cater to first-time homebuyers.
  • Rocket Mortgage: Consider Rocket Mortgage if you’d prefer an online-first experience.
  • PennyMac Mortgage: PennyMac offers a wide variety of home loans and shares current rates on its site, which can be helpful for people looking to buy their first home.
  • USAA Mortgage: USAA is a good option for military members and their families. 
About the author: Janet Berry-Johnson is a freelance writer with a background in accounting and insurance. She has a bachelor’s degree in accounting from Morrison University. Her writing has appeared in Capitalist Review, Chase News &a… Read more.