Here's What to Expect from Mortgage Underwriting

Loan underwriting may sound mysterious, but chances are, you already experienced a similar (albeit simpler) process for your pre-approval letter. While pre-approval makes you competitive to sellers, it is not an official guarantee from your lender. Underwriting makes it official. It’s the final step for your lender before you close on the property.

Because underwriting is typically a hands-off part of loan approval, many home buyers and property investors don’t know what to expect from this financial process. There are steps you can take to ensure this goes as smoothly as possible because it’s important to know what’s happening behind the scenes.

What is underwriting?

Mortgage underwriting is the process during which your lender (whether a bank, broker, or credit union) decides if you qualify for the mortgage that will buy your property. Because you’re asking to borrow such a large sum, the lender isn’t going to hand it over without some thorough investigation into your financial background. A team of people working for your lender (underwriters) will look into your finances and the prospective property. From there, they will decide to extend a loan.

What does an underwriter do?

After you go under contract, an underwriter will verify your income, debt, and assets. This is all based on the documents you submit per their request—and, yes, you will need to resubmit what you already gave them during the pre-approval process. They will then assess the property itself with an appraisal and title search.

After gathering all the information they need, they will determine the risk of lending to you and either approve or deny you that whopping home loan.

What does the underwriting process include?

There are a number of steps in the underwriting process, which is why it feels like it takes such a long time! Here’s what to expect.

Financial review

You, the borrower, will need to submit a handful of basic documents like recent pay stubs, tax returns, and account statements to your lender. From here, they’ll ensure that you have income to support your monthly mortgage payment as well as the funds for the down payment, closing costs, and some leftover for any worst-case-scenario maintenance or costs.

If you have any derogatory marks on your credit history, you may need to submit a statement that explains why that’s the case. Submit your investment asset statements like stocks, bonds, retirement accounts, or other real estate to show off your high net worth and financial health.

Appraisal

An appraisal is based on the sales price of similar properties in your area. It helps your lender understand the objective value of your new home. Once all the proper documentation is received, your lender will order an appraisal, which will ensure that the property is worth what you’re paying (or more) because the property itself acts as collateral in case you default on the loan.

Typically, the lender will order the appraisal, and you (the buyer) are involved only when the appraisal report comes in. The cost of the appraisal is often packaged up in your lender fees, so no action is required from you to choose, hire, or pay an appraiser. In fact, appraisals are required to be an “arm’s length” transaction, meaning neither you nor the lender can “choose” the appraiser.

Title search

“Title” specifies who has rights to the property. During underwriting, your lender wants to make sure that they (and you) are protected from any defects in the title that give another party a claim to the property. This could be other mortgages, a lien, an easement, or even a missing heir.

Typically, your lender will employ a title company to perform this final title search. And they will purchase title insurance to cover their stake in the property. You (and/or the seller, depending on your contract) should also purchase title insurance to protect yourself from any of these rare title problems.

The underwriter’s decision

After all is said and done, there are four possible outcomes: approved, denied, suspended, or approved with conditions.

Approval: This is straightforward. You’ve been approved, and no further action is required. Congratulations!
Denial: It’s rare that you will be denied this late in the process unless your financial situation has changed since you applied for pre-approval. If this is the case, find out why you were denied so you can take any necessary steps to work toward approval. This could include funding a larger down payment or changing the type of loan you are pursuing.
Suspension: There was a hole in your application, like an inability to verify your employment. Usually, you can reactivate the application by providing any missing information.
Conditional approval: Your financial information has been approved, but more documentation is required to deem you fully qualified. This includes waiting on proof of insurance coverage, an appraisal, or a clear title report.

What does an underwriter look at?

An underwriter takes a broad look at your finances. This includes:

Employment and salary information: Determines your ability to repay the loan.
Bank account statements: Determines if you have money for the down payment and closing costs—plus some reserves after purchasing.
Credit score and history: This includes the score itself as well as late payments, foreclosures, and bankruptcies.
Debt-to-income ratio (DTI): Represents the amount of your income that goes toward paying off debts. It’s calculated by taking your total monthly expenses. This includes the new mortgage being underwritten—with PITI (principal, interest, taxes, insurance) and any applicable mortgage insurance premium costs—and dividing by your gross monthly income.
Loan-to-value ratio (LTV): This takes the appraisal, mortgage amount, and down payment into account. It’s calculated by dividing the mortgage principal by the appraised property value, so a higher down payment will improve this percentage.

How long does underwriting take?

As with any part of the home-buying process, this varies depending on your personal financial situation. You should do your part. This means handing over all the necessary documents to your lender as soon as possible. A 30–45 day window is typical for the underwriting process, though a decision can be made within weeks.

Your offer contract should have stated a deadline by which you must apply for the loan, so make sure you’re working with your lender before this deadline passes to avoid a breach of contract.

Underwriting mistakes to avoid

The underwriting process is complicated—and delicate, too. Here’s what buyers shouldn’t do while the underwriter is working.

Ignore emails from the lender. You should be immediately available to fulfill any requests or send any documents to make the process go as quickly and smoothly as possible. Make sure to check your email at least once a day after you go under contract on a house.
Offer to buy at the wrong price. It’s the exception and not the rule when an appraisal comes back short. If an appraisal does come back lower than your loan amount, there’s a possibility that you (and your agent) have submitted an offer higher than the property is worth. To avoid issues with appraisal, make sure you are looking at comparable properties in the same area that have sold within the last 90 days to determine an accurate offer price.
Overlook the limitations of your loan. Certain loan types, like FHA and VA loans, require the property to be in livable condition. This includes—but is not limited to—sufficient heating, roofing, electrical, appliances, a safe and usable kitchen, and at least one usable bathroom. Take this into consideration when offering on properties to avoid underwriting skirmishes down the road.
Lying to your lender. Underwriting is basically the process of fact-checking all of the statements you made in your loan applications. If you fudged a few facts about your income or savings, this’ll come back to bite you in this final step. You should disclose everything about your financial history from the get-go so that if denial is on the horizon, you can get it over with as soon as possible (rather than after you’ve already committed to one home and spent money on inspections).
Financial monkey business between “under contract” and “closing time.” As soon as you are under contract on a property, treat your finances like a temple to avoid red flags during the underwriting process. Don’t make any big purchases, open any new lines of credit, buy a new car, change jobs, or miss any payments. In fact, the entire time you’re looking for a house and going through the loan process, you should try to spend as little as possible. (Then you can save the extra money for unexpected expenses during the transaction.)

Underwriting is the final step for your lender in which they verify all of your information and decide whether to officially extend a loan. After going under contract on a property, your lender will verify your income, debt, and assets as well as order an appraisal and a title check for the property.

Besides simply being cooperative and honest during the entire loan process, make sure you’re offering at the right price and on the right property to avoid problems with approval. Similarly, take good care of your finances and avoid large transactions during the entire home-buying process to ensure a smooth underwriting process. After underwriting, you’re off to closing—and on your way to homeownership!

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.