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A home loan is a huge commitment, with your lender taking on risk to let you borrow. As a result, it’s common for a mortgage underwriting process to be in place to verify your income and assets. This process can ultimately impact whether your home purchase goes through.
Here’s what you need to know about the home loan underwriting process:
- What is mortgage underwriting?
- What to expect during the underwriting process
- How long does underwriting take?
- Steps of the underwriting process
- Tips for the underwriting stage
What is mortgage underwriting?
The underwriting process is basically a way for your lender to verify your financial situation and evaluate whether you’re an acceptable risk as a borrower. Often, the mortgage underwriting process takes place after you’ve been pre-approved for your home loan.
While your home is under contract, underwriters will go through all of your information and documentation and decide whether to go through with the transaction.
- Credit
- Down payment
- Appraisal
- Income
- Debt-to-income (DTI) ratio
- Assets
These items can also impact the home loan rates you get.
What to expect during the underwriting process
Underwriters go through everything about your financial situation to determine whether it makes sense to make such a large loan to you. Whether you get a 30-year fixed or a 15-year fixed loan, you’ll have to go through the mortgage underwriting process.
Not every lender has the same process, but many lenders receive guidance from Fannie Mae and Freddie Mac — allowing them to sell their loans to these entities for servicing.
Credit
The underwriting process includes a review of your credit, especially your credit score, to see whether you meet specific minimums. For example, Fannie Mae requires a credit score of at least 620, using approved scoring models.
An underwriter will also review your credit report for red flags and other issues. Included in the credit review is your DTI, with a requirement for your DTI to be no more than 43%.
Learn More: How Your Credit Score Impacts Mortgage Rates
Down payment
It’s not enough to say that you have a certain down payment. The underwriting process includes reviewing where you got the down payment money from. An underwriter will look at your bank statements and assets, and might even verify the deposit with your institution.
Additionally, the down payment can’t be a loan, and if you get a portion of the down payment from someone else, they must confirm that the money is a true gift.
Appraisal
An underwriter is also responsible for managing the appraisal process with an independent professional. The home appraisal must include the market value of the home and there are specific requirements that must be met to be compliant with guidelines from Fannie Mae and Freddie Mac.
In the end, if the home appraises for less than the selling price, the deal might not go through — unless the seller lowers the price or the buyer comes up with more money to make up the difference.
Income
To determine that you have adequate income to make mortgage payments, the underwriting process requires income verification. Fannie Mae has underwriting guidelines that spell out how to verify employment income with pay stubs, as well as how to evaluate commissions, self-employment, and even secondary employment. An underwriter might even go through your tax returns and look at different schedules to determine the true status of your income.
Find Out: What Are No-Doc Loans? How to Get a No-Income-Verification Mortgage
Assets
It’s not enough to verify your income in the home loan underwriting process. There’s also an asset assessment designed to figure out if you can afford the down payment, or if you have an adequate reserve to make payments.
Underwriters look at your bank accounts, investment and retirement accounts, real estate holdings, and anything else that might be of significant value. Underwriters also look at your loans and other liabilities and how they impact your overall picture.
- Approval: The loan ultimately goes through and the funds are disbursed at closing and provided to the seller.
- Denial: There’s some reason that a mortgage lender decides not to issue the loan after all. The lender has to provide you with the reason for the denial. You might be able to fix the problem and get an approval later. For example, if your DTI is too high, you might be able to pay down a loan and then receive approval.
- Suspension: If there isn’t enough information to make a decision, the lender can suspend your application until you provide the documentation needed. Usually, the lender will let you know how to proceed so you can get the right information and re-activate your loan application.
How long does underwriting take?
The underwriting process typically takes between three to six weeks. In many cases, a closing date for your loan and home purchase will be set based on how long the lender expects the mortgage underwriting process to take.
Steps of the underwriting process
When you move forward with getting a mortgage, here are the steps of the underwriting process you can expect to go through and about how long each generally takes.
1. Get prequalified
How long it takes: One to three days
Before you think about buying a house, talk to a few lenders about what you might be able to borrow. You can figure out how much home you can afford and get an idea of rates. A lender can usually provide prequalification information in less than a day using basic income and credit data. However, sometimes it can take up to two or three days to get prequalified.
Credible can help you compare mortgage rates from multiple lenders faster — you can see your prequalified rates from our partner lenders in the table below in just a few minutes.
2. Home appraisal
How long it takes: Two days to one week
Your home appraisal is a huge part of the underwriting process and is usually a contingency in the purchase agreement. The physical house inspection typically takes less than three hours, but it can take a couple of days to a week before the appraisal is sent to your lender.
3. Income and asset verification
How long it takes: Three weeks or longer
During the underwriting process, usually as the home appraisal is taking place, your income and assets will be verified. This can take three weeks or longer, depending on how you respond to inquiries and the complexity of your situation.
4. Apply and wait for a decision
How long it takes: One to two days to apply; up to 60 days for the decision
You’ll also be officially applying for the mortgage loan and waiting for a decision. Getting everything together and applying can take one or two days, since these are complicated applications. The decision can take a while, including up to 60 days, depending on other factors.
Read More: 5 Types of Mortgage Loans: Which One Is for You?
5. Clear contingencies
How long it takes: One to two weeks
If there are contingencies on the purchase agreement, such as loan approval or a home inspection, these all need to be cleared before closing. Depending on the timeline, it can take one to two weeks (or longer) to clear contingencies.
6. Close on the home
How long it takes: 45 days
As long as everything is in place, you can expect to close on the home within two months from the date of your purchase agreement. The average time it took to close on a home purchase in August 2020 was 45 days, according to a report by mortgage technology company Ellie Mae.
The actual closing only takes a couple of hours if all of the paperwork is in order and escrow can be verified.
Tips for the underwriting stage
When going through the mortgage underwriting process, you can make sure things happen as quickly and smoothly as possible by:
- Not applying for other credit lines: Additional credit inquiries can impact your score, and adding new credit lines can change your DTI. Getting new credit and loans in the middle of the underwriting process can result in denial.
- Responding quickly to questions: If the lender has questions, answer them quickly. Any delay in your response could push out your closing dates.
- Providing all documentation: Give the lender all the documents they ask for, whether that’s bank statements, tax returns, or letters from others affirming a gift of a down payment. Without the documentation, your closing could be delayed or your application denied.
- Being upfront about finances: Don’t try to hide financial issues. Be forthright. The underwriting process will uncover issues, and you’ll have less trouble if you’re honest in the beginning so the lender can work with you.
Credible makes comparing multiple lenders quick and easy — you can see your rates from our partner lenders in the table below in three minutes.
