How the Mortgage Underwriting Process Works

The mortgage underwriting process is an important step along the path to loan approval. It's a time when borrowers hold their breath, cross their fingers, and hope they don't get any bad news from the lender. When you make it through underwriting, it's basically downhill from there.

But what actually happens during this process? What does the underwriter look for? And what can you do, as a borrower, to help ensure that everything stays on track? Here's an in-depth look at the mortgage underwriting process.

Mortgage Underwriting Definition

Before we go any further, let's start with a basic definition.

Mortgage underwriting -- Is a process through which banks and lenders measure the risk of loaning money to a certain borrower, and to determine if that risk is acceptable. The mortgage underwriting process also ensures that the borrower meets all requirements for the particular loan being offered.

This process takes place after the loan application and supporting documents have been submitted, and before the final closing day. It involves an in-depth review of the loan, the borrower, and all of the supporting loan documents.

What Happens During This Process

The mortgage underwriting process has three main purposes:

  • It evaluates the level of risk associated with a particular loan.
  • It ensures that the borrower meets all requirements for the loan.
  • It ensures that all of the required documents are in place.

Let's take a closer look at these three components:

1. Evaluating risk.
Underwriting is one of the risk-analysis tools used by lenders. The "risk" in this context is the likelihood of borrower default. The mortgage underwriting process helps the lender determine how likely it is that the borrower will default (or fail to repay) the loan in the future. They determine this by reviewing the borrower's credit history, payment history, debt-to-income ratio, and other factors. Borrowers who are considered to be a higher risk often have a harder time qualifying for loans.

2. Ensuring the borrower meets loan requirements.
Different types of home loans have different requirements associated with them. Some of these requirements come from the lender that originates the loan, while others are imposed by a secondary organization (like the Federal Housing Administration or Freddie Mac). During the mortgage underwriting process, the underwriter will make sure that the borrower meets all of the requirements for the specific loan being used.

3. Checking loan documents.
There are many documents required during the mortgage application and approval process. They include (but are not limited to) bank statements, tax returns, W-2 forms, and pay stubs. Checking and verifying loan documents is another important part of the mortgage underwriting process. The lender wants to ensure that everything is squared away, before they send the "docs" to the closing or escrow agent.

Above all, the lender wants to assess the borrower's ability and willingness to repay the loan. Willingness is a bit hard to measure. But they can measure a person's financial ability to repay by examining income and assets, combined debts, and past credit / borrowing history. These are the things lenders are most concerned with during the mortgage underwriting process.

The Source of Underwriting Guidelines

So where do these mortgage underwriting guidelines come from? This will depend on the type of loan you're seeking.

Most mortgages today are based on guidelines that come from the FHA, the VA, Fannie Mae or Freddie Mac. The FHA (Federal Housing Administration, part of HUD) insures home loans made by direct lenders such as Wells Fargo and Citi. Similarly, the Department of Veterans Affairs (VA) guarantees loans made by mortgage lenders. Fannie and Freddie actually purchase loans made by lenders.

So if a mortgage company wants to sell its loans into the secondary market, or have them insured by the federal government, they must adhere to the underwriting guidelines issued by those organizations. So you can think of these as "baseline" or minimum requirements.

If you really want to learn the nuts and bolts of the loan-approval process, you could review the mortgage underwriting guidelines put out by the FHA, Freddie Mac and Fannie Mae. You can find these handbooks online by doing a Google search. All three of these organizations offered various "fact sheets" and FAQ pages that summarized the bulk of their guidelines.

Keep in mind that individual lenders will have their own internal guidelines as well, in addition to those mentioned above. They are free to do business however they want, as long as they don't violate federal or state lending laws. This is why it's possible to get rejected by one lender, and then approved by another the very next week.

How Long Does the Process Take?

The length of the mortgage underwriting process can vary due to a number of factors. A highly experienced underwriter who works quickly might process three times as many loans as a brand-new underwriter who is still learning the ropes. The mortgage company's backlog of applications plays a role as well. Also, some borrowers have more "issues" that need to be resolved along the way, and this can lengthen the underwriting process.

So it could take anywhere from a few days to a few weeks (from the time your application reaches the underwriter to the time you're actually approved or denied). Five business days is probably average.

Learn more about the timeline.

You're Not Approved Until the Underwriter Says So

A lot of first-time home buyers get the pre-approval confused with the final approval. They are two different things. Getting pre-approved by a mortgage lender is a worthwhile process. It lets you know how much they are willing to lend you. It will also make sellers more inclined to consider you're offer, since you've been "screened" by a lender already.

But the pre-approval is not a commitment or guarantee to lend. There is still a lot that can go wrong between the pre-approval and the final approval. Remember, the mortgage underwriting process takes place after the pre-approval and prior to closing.