Once you've gone through the rigamarole of rate locks, appraisals, and inspections, you're in the final steps of your home loan application. Next up: underwriting, which is when your lender assesses your application to determine whether or not you’re approved for your loan. Put simply, underwriting is when the decision is made.
Underwriting may sound scary, but it becomes a lot less scary when you know what it all entails. Let’s go through the entire underwriting process, so you can sleep better as you prepare to get that approval.
What is the purpose of mortgage underwriting?
To get started, let's talk about risk. All lenders inherit a certain amount of risk with each loan they generate, because all borrowers come with inherent risk factors. No matter how likely it seems that a borrower will repay their loan on time, it's impossible to envision every future scenario that may cause them to default. Instead, lenders take certain regulatory compliance measures to protect themselves and their borrowers from inheriting too much risk.
In other words, they must consider factors and circumstances that might cause them to lose their investment.
And that's where underwriters come in. It's their job to approve or deny your loan application based on a set of established risk factors. During underwriting, these lending guideline experts take an in-depth look at your overall financial picture and your supporting documentation. If everything checks out, your application will be approved. However, if the underwriter determines that lending to you could be a risk, or the property is insufficient as collateral, and the issues cannot be cured by further documentation or repairs to the property, your loan could be declined.
What do underwriters look for to approve a loan?
Underwriters review all of your submitted financial documents to ensure that you have the ability and willingness to repay your mortgage, in accordance with the Ability to Repay (ABR) rule. (Super quickly: the ABR rule basically says that lenders can’t give you a loan that you won’t be able to pay back.)
Although some of your financial documents may have been requested at the start of your loan application, it’s totally normal for you to be asked for additional details or statements during the underwriting process. We’ll go through some common conditions needed for approval and why they matter.
It’s a long list, but rest assured that you may not be asked to provide every single document here. Still, it doesn’t hurt to have an idea of what to expect and why underwriters want certain pieces of information.
Common conditions to satisfy mortgage approval:
Income and asset verification
- Written verification of employment: Lenders usually verify your employment by asking for your most recent W-2 and paystub. They may also ask that your employer fill out a form with information such as your hire date, your position, your salary, and your recent earnings. In some cases, lenders may also ask to verify your employment over the phone by speaking with a supervisor or human resources representative. If you work as a freelancer or on a contract basis, you can provide a 1099 form to verify income.
- Tax returns: Your lender may ask for 2 years of tax returns to verify your income. You will likely also be asked to sign a 4506T form, which is used to obtain tax transcripts in the event they are needed. (This helps the lender see if you filed any amended returns.)
- Profit and loss statements: If you are self-employed, you may also be asked to provide a profit-and-loss statement to show the underwriter how much of your taxable income you are able to spend.
Additional credit profile details
Supplemental credit information: If you’ve made some recent changes to your credit that may impact your score for the better, (for example, bringing any delinquent accounts current or paying off any outstanding debts, such as credit card balances or loans), then you may be asked to submit information about it.
Credit reports can take a few weeks to update, so any supplemental credit information can be used to ensure that the underwriter has the most up-to-date info once your credit report has been pulled.
Other financial inquiries
- Documentation for other real estate that you own: If you own additional real estate, then you may be asked to provide documents about those properties. Typically, the lender will ask for proof of homeowners insurance, property taxes, or any relevant HOA documentation.
- Letters of explanation: If there are any large or irregular deposits in your bank accounts, gaps in your job history, old charge-offs, or tax liens on your credit report, you may be required to write a short letter of explanation.
Home purchase documentation (not needed for a refinance)
- Purchase contract and final closing document: If you had to sell your previous home to be able to afford or secure down payment funds for your new one, then your underwriter may ask for documents pertaining to the - sale of your home to prove that the sale went through.
- Proof of earnest money deposit: Usually, a copy of the cancelled earnest money check (front and back, showing it has cleared your account) is sufficient proof that you completed your earnest money deposit. Some lenders will also check your bank statements or require proof that the check cleared.
- Gift fund documents: If you're receiving gift funds to apply toward your down payment or closing costs, the donor must show that they have sufficient funds to provide the gift. You may need to provide bank transaction receipts or statements that you received them. Your donor may also be requested to provide a letter confirming the money is a gift and will not need to be repaid.
- Terms and conditions of withdrawal: If a portion of your down payment funds is coming from a retirement account, such as a 401k plan, you will have to provide information about the terms and conditions of the withdrawal, found in the Summary Plan Description paperwork for that account. This helps the lender verify that borrowing from your account is both allowed by your plan, and won’t interfere with mortgage loan guidelines.
What happens when a mortgage goes to underwriting?
Now that you know a bit more about what information underwriters look for when they assess your loan application, here’s what happens during the underwriting process.
A review of your finances: First, the underwriter will make a reasonable effort to ensure that you have the ability to repay the mortgage based on the terms of the loan. According to regulations put in place by the Consumer Finance Protection Bureau (CFPB), underwriters must verify you will be able to repay your loan by reviewing your employment, your existing debts, and other aspects of your financial wellbeing. They will also check your credit history to indicate your willingness (or likelihood) to repay the loan. If you have a good credit score, it generally indicates that you pay your bills on time.
Verification of identity: Second, the underwriter must check your information for instances of identity fraud or another type of misrepresentation. This is a routine and required check, not only for loan security, but also because there are an increasing number of mortgage fraud schemes.
Confirmation of loan quality: Finally, the underwriter will look for any red flags or irregularities that might prevent the loan from being insured or sold to other lenders after closing. Any deficits of this kind would present a risk to the lender, and may affect your ability to be approved.
While this is largely outside of your control, underwriters consider this because oftentimes your mortgage will be sold to another lender or loan servicer to collect payments after closing.
Don’t worry though, this won’t affect your mortgage, payments, or loan terms in any way. Some lenders simply stick to creating, or originating, loans while others service (collect mortgage payments on) your loan themselves.
The underwriting process timeline and outcomes
Underwriting can take anywhere from a few days to a few weeks, depending on how quickly you turn around requested documentation and how many other loans are in underwriting at the moment. Once complete, you can expect to receive one of 3 outcomes:
Conditional approval: Congrats, you’re good to move forward! This means the underwriter feels confident that the loan can be approved, subject to any outstanding documentation. Additional information about your financials or property details—such as the appraisal and title reports—may still be needed before you’re fully approved for closing, but you’re nearly there.
If all goes as planned, and you can provide the outstanding information requested, you’ll be approved for your mortgage in no time. Better Mortgage can typically provide a final approval within 24–48 hours of receiving all requested documentation.
Additional information needed: If you are unable to provide the documentation requested in the conditional approval, or if the documentation doesn’t satisfy the issue, your loan may need additional information to verify your finances to become conditionally approved. In this case, your loan officer or processor will usually contact you to help you through the issue, and they may request additional documentation so that you can be moved on to an approval.
Recommendation of denial: In certain circumstances, the underwriter may determine that it’s too risky to move forward with your loan. This might be because your financials or the property itself does not meet certain standards required for your mortgage.
While this outcome can certainly be disheartening, keep in mind that it’s the underwriter’s job to assess risk for the lender and borrower, i.e. you. Being denied for a mortgage that is too risky for your financial situation may help you avoid larger issues down the road—like foreclosure. Also, denial doesn’t always mean that there’s no path forward. You may just need to add a co-borrower to your loan application or work on improving your financial situation, depending on the reason for denial.
The bottom line
Though the underwriting process might seem a bit intimidating, it doesn't have to be. If you’re able to satisfy the underwriter’s requests with a reasonably quick turnaround, then you should be able to secure the loan approval you need to buy your home or refinance your mortgage.
At Better Mortgage, this process looks a little different because our technology helps us make things run a little quicker and more smoothly. Traditionally, underwriting can take over a week. With Better Mortgage, it can be completed in as little as 3 days, getting you that much closer to closing on your home.