When a seller accepts your offer on their home, you may start dreaming of barbecues on the back patio, cooking brunch on the weekends, or getting cozy for movie nights. However, there’s a big hurdle you must clear before you can close on your new home and get the keys: mortgage underwriting.

Knowing how the underwriting process works can help you avoid costly mistakes that might delay or derail approval of your mortgage application.

Key Takeaways:

  • When you apply for a home loan, a mortgage underwriter collects and verifies your financial information to ensure you can afford the loan.
  • Underwriting is a process that confirms your financial assets, debts, credit history, and credit score, and calculates your DTI ratio to decide whether to approve your mortgage application.
  • Being prepared for underwriting and responding quickly to requests for additional information will help make the process go more smoothly.

What Is Mortgage Underwriting?

Mortgage underwriting is part of the loan approval process and verifies whether your finances and the home you’re buying justify the mortgage you want.

Mortgage underwriting happens after you and the seller sign a purchase and sale agreement, and you officially apply for a mortgage. The mortgage lender collects your financial paperwork and sends it to the underwriter to verify. If the loan is approved, you’re clear to close and ready to complete the homebuying process.

Manual underwriting vs. automated underwriting

Most mortgages are underwritten using an automated process, such as the Desktop Underwriter application used by Fannie Mae. Manual underwriting is when a person reviews your mortgage application by hand.

Lenders may use automated mortgage underwriting to save time and process more applications at once, says Amber Smith, a mortgage loan originator at First Option Mortgage in Salisbury, Maryland. However, manual underwriting can be better for folks with unique situations — such as having no credit — since it allows the underwriter to consider details that fail to fit into the scope of automated underwriting.

“There is room for gray, whereas the automated underwriting system is black and white,” Smith says.

Check Out Our First-Time Homebuyers Guide

Preparing For Mortgage Underwriting

Getting preapproved for a mortgage and gathering all your financial documents in advance can improve your underwriting experience.

Mortgage preapproval

Mortgage preapproval is a lender reviewing your finances and estimating the mortgage it expects to offer you. Preapproval is not an official offer, as your finances are not reviewed as carefully as they are when underwriting an official loan application.

The advantage of mortgage preapproval is in getting an idea of how much you can borrow to buy a home, and to show real estate agents and sellers how much house you can afford.

Don’t confuse mortgage preapproval with pre-qualification, which often requires no verification of the borrower’s finances at all.

Gather your documents

You can speed up the underwriting process by gathering your financial documents in advance so you can present them to your lender for review. While different types of loans or types of lenders may require different documents, you can expect to be asked to provide paperwork detailing your income, assets, and debts.

The 7 Steps of Mortgage Underwriting

The underwriting process is where the lender verifies your mortgage application and finances to determine whether you’ll be approved for a home loan — and for how much. Here are the steps involved in the process.

1. Submit your application

Once you and the seller sign a purchase and sale agreement, you will complete an official loan application and submit it to your lender of choice. The application gives the lender permission to check your credit score and verify your finances.

2. Provide the required documents

Expect to be asked to provide supporting documentation. Common requirements include:

  • A signed purchase and sale agreement.
  • Identification.
  • Recent pay stubs, W-2 or 1099 forms, or income tax returns.
  • Checking and savings account statements.
  • List of current debts, such as car loans, student loans, or credit cards — possibly including account statements.
  • Investment and retirement account statements.
  • Other relevant financial documents, such as court records for alimony and child support payments.

3. Credit check

The underwriter will review your credit report and credit score. Some red flags in your profile may include no credit history or a record of late payments.

Generally, you need a credit score of at least 620 to be approved for a conventional loan, and a credit score of at least 500 to be approved for a loan backed by the Federal Housing Administration. Loans insured by Veterans Affairs and the U.S. Department of Agriculture don’t require a minimum credit score.

4. DTI ratio calculation

To evaluate your ability to repay the loan, the underwriter will compare your monthly debt payments to your gross monthly income. The resulting calculation is known as your debt-to-income ratio. In general, the maximum DTI ratio that lenders allow for a conventional loan is 50%. If the loan is manually underwritten, the maximum DTI ratio drops to 45% and comes with certain eligibility requirements.

5. Asset verification

You can expect the underwriter to examine your assets, which include checking and savings accounts, stocks, investments, and cars. The underwriter also verifies that you have enough money for your down payment and closing costs, as well as a reserve to ensure you can continue to pay your loan even if your income is interrupted.

6. Home appraisal

A home appraisal is an independent evaluation of the property’s fair market value and confirms for the lender that the loan amount matches the home’s value. While the lender typically orders the appraisal, the buyer pays for it as part of their closing costs.

7. Decision

The underwriting result has four possible outcomes:

  • Approval. The underwriter finds that your finances qualify you for the loan, and you are cleared to close.  
  • Conditional approval. The underwriter needs more information before approving you for the loan. This often relates to determining the source of recent deposits in the case of new loans, or gifts from a donor. If you can prove these deposits pose no financial risk, you’ll move on to closing.
  • Denial. Your finances do not qualify you for the loan and your application is denied. This is possible even if you’ve been preapproved by the lender.
  • Suspension. Your file lacks enough information for a decision, and you’ll need to work with the underwriter before proceeding. This might happen if you submit incomplete bank statements, outdated pay stubs, or unsigned tax forms.

How Long Does Underwriting Take?

Mortgage underwriting may take only two or three days if your finances are simple to verify, but it typically takes more than a week. The process could also trigger some questions from the underwriter, adding further delays.

“It is very important that the homebuyer responds to these questions quickly so that they may finish underwriting the loan,” Smith says.

6 Tips for a Smooth Underwriting Experience

Follow these tips to improve your chances of a smooth underwriting experience.

1. Don’t be afraid to ask questions

Ask your real estate agent or lender questions if you’re confused about homebuying jargon or any steps in the underwriting process.

“Often, people in the mortgage industry will throw around terms that borrowers do not fully understand,” Smith says.

2. Be open with your lender

If you think there might be a problem with your application, be upfront and honest about it with your lender. Your lender may know the best way to handle problems that could delay or derail your mortgage approval.

“Discrepancies in the loan application can break the deal,” Smith says.

3. Provide up-to-date paperwork ASAP

The underwriting process may involve requests for additional paperwork.

“Be prompt with returning requested documents and signing disclosures,” Smith says.

It’s also important to make sure everything you submit is up to date.

“Many times, we have issues because the driver’s license is a month away from expiration or the pay stubs are from two months ago,” says Benjamin Schandelson, a mortgage loan originator at MJS Financial LLC, a mortgage brokerage in Boca Raton, Florida.

4. Don’t make big purchases at the last minute

Avoid large purchases of any type during the underwriting process, Smith says. A hard credit inquiry or increased credit card balance may hurt your credit score, which could result in a higher mortgage rate and more expensive monthly payments.

5. Be mindful of large cash deposits

Lenders will check your bank statements for any large deposits in the past two months. Large deposits — defined by Fannie Mae as a single deposit of more than 50% of your qualifying monthly income for the mortgage — must have documentation to prove that the money came from an acceptable source. For example, Freddie Mac guidelines state that funds from a family member must include a signed gift letter with the donor’s contact information and relationship to the borrower, the gifted amount, and a note confirming that the money doesn’t have to be repaid.

6. Make a larger down payment

A large down payment reduces the amount you need to borrow and reduces your loan-to-value ratio. The underwriter’s primary concern is reducing risk, and if you reduce your LTV ratio, you raise the underwriter’s confidence that you can afford the loan.

FAQ: The Complete Guide to Mortgage Underwriting

Here are answers to common questions about mortgage underwriting.

Can a loan be denied after closing?

Once you close, the loan agreement is bound by law and cannot be taken away. However, any moment up to that point could result in a loan cancellation if you no longer meet the lender’s criteria.

Does a mortgage lender’s credit check lower my credit score?

An inquiry into your credit indicates that you may take on new debt, which will lower your credit score. But this will only drop your score slightly, and it is a necessary step of the mortgage approval process.

Can a loan officer override an underwriter?

No, a loan officer cannot influence the underwriter’s decision. While a loan officer wants you to succeed, the underwriter must stick to hard facts about your financial situation. If your loan is denied, the loan officer cannot resubmit your application to another underwriter.

The Bottom Line on Mortgage Underwriting

Underwriting is an important part of the homebuying process. You can help things run more smoothly by knowing what to expect, preparing for documentation requests, and keeping your paperwork complete and up to date. If not, you could risk delaying approval or having your mortgage application denied.

Michael Rosenthal and Rory Arnold contributed to the reporting of this article.