You’ve found a home you love, complete with a spacious kitchen, the right number of bedrooms and a yard. So how do you get from serious shopper to happy homeowner? By taking out a mortgage to finance the purchase. Here’s what you need to know about the mortgage underwriting process.
When applying for a mortgage or loan you will go through a process called underwriting. This is where a professional called an underwriter reviews your finances to determine if you qualify.
Underwriters play a key role in the lending process. But what exactly do they do? And what kinds of documents and information do they typically request from borrowers?
In this comprehensive guide we will explain
- What underwriters do
- The stages of underwriting
- Common documents underwriters ask for
- Why these documents are needed
- Best practices for borrowers
What Do Underwriters Do?
An underwriter works for a bank, mortgage company or other lender. Their main job is to analyze a loan applicant’s finances, income, debts and assets.
The underwriter determines if the applicant meets the lender’s requirements to qualify for the loan. They evaluate the overall risk level of lending money to that person.
Underwriting is one of the final steps before a lender approves (or denies) someone for a mortgage, auto loan, personal loan or other type of financing.
It ensures the borrower isn’t taking on more debt than they can reasonably afford to pay back. Underwriters protect lenders from making overly risky loans that may default.
Key Stages of the Underwriting Process
Underwriting involves several key steps, including:
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Pre-qualification – The lender does a preliminary review of the applicant’s credit, income, debts and downpayment funds. This gives an initial loan eligibility assessment.
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Application – The borrower completes a full loan application with details about their financial situation.
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Verification – The lender verifies the details by checking documents, credit reports, employment info and assets.
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Appraisal – For mortgages, the property is appraised to ensure its value matches the sale price.
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Underwriting decision – Finally, the underwriter analyzes all factors and makes a decision to approve, deny or request more information from the applicant.
What Documents Do Underwriters Ask For?
As part of the verification process, underwriters need to review many documents that provide evidence of an applicant’s financial standing.
Here are some of the most commonly requested items:
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Pay stubs – Underwriters look at recent pay stubs to verify income and employment.
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W-2 forms – Previous W-2s help show a stable earnings history.
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Tax returns – Underwriters require personal and/or business tax returns, depending on your situation.
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Bank statements – Recent bank statements demonstrate you have funds available for downpayments and closing costs. Underwriters look for irregular deposits or withdrawals.
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Asset statements – Documentation for assets like retirement accounts, investments and property.
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Credit report – Your credit report shows your payment history, debts and other factors that influence loan eligibility.
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Debt statements – Any documentation for current debts, such as credit cards, auto loans, student loans, child support, alimony and more.
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Verification of Employment – The lender confirms your employment details directly with your employer.
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Appraisal report – For mortgages and home equity loans, underwriters review the property appraisal.
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Letters of explanation – You may need to explain issues like employment gaps, credit report items and certain bank account deposits or transfers.
Providing complete, accurate documents helps underwriters verify your details faster. Attempting to hide any issues could lead to a loan denial.
Why Do Underwriters Need These Documents?
There are some key reasons underwriters require all this financial information:
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Confirm your income – Documents like pay stubs and tax returns verify your stable income. Underwriters need to know you make enough money to afford the new loan payment.
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Check assets – Bank and investment statements show you have the cash to cover the downpayment and closing costs for the loan.
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Assess debts – Your total monthly debts, along with the new loan payment, determine your debt-to-income ratio. Underwriters want to see you aren’t taking on excessive debts compared to your income.
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Evaluate credit – Your credit report gives insight into how responsibly you’ve managed past debts. It’s a key factor in determining your loan eligibility and interest rate.
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Validate employment – Underwriters confirm your current job status and income to ensure you will have a steady paycheck to cover the new loan payment.
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Review property value – For mortgages, underwriters verify the home’s appraised value matches the price you agreed to pay for it.
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Check for issues – If underwriters spot anything unusual, you may need to provide details or explanation with supporting documents. This alleviates any concerns.
By analyzing all these pieces of your financial puzzle, underwriters gain a complete picture of your ability to take on the new loan and repay it on schedule.
Tips for Borrowers to Expedite Underwriting
Here are some best practices borrowers should follow to help make sure underwriting goes smoothly:
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Get organized – Keep all your pay stubs, tax forms, statements, contracts and other key documents in one place for easy access.
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Act fast – Quickly provide any additional paperwork the underwriter requests. Delayed responses can drag out the process.
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Explain issues – Be up front in letters of explanation about things like employment gaps, credit report items or bank account deposits.
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Work with your loan officer – Stay in close contact with your loan officer and ask questions if anything is unclear.
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Double check details – Carefully review documents before submitting to ensure all info is complete, accurate and legible.
The underwriting process is meticulous for good reason – it protects lenders from undue risk and ensures borrowers don’t take on too much debt.
Knowing what underwriters look for and providing requested documents promptly will help move you smoothly toward loan approval.
Step 2: Be patient with the review process.
Once you’ve submitted your application, a loan processor will gather and organize the necessary documents for the underwriter. A mortgage underwriter is the person that approves or denies your loan application. Let’s discuss what underwriters look for in the loan approval process. In considering your application, they look at a variety of factors, including your credit history, income and any outstanding debts. This important step in the process focuses on the three C’s of underwriting — credit, capacity and collateral.
One of the most important factors in the mortgage approval process is your credit history. The underwriter will review your credit report to see how well you made payments on, or paid off car loans, student loans and other lines of credit. They look for clues that will help them predict your ability to pay back what you borrow.
When trying to determine whether you have the means to pay off the loan, the underwriter will review your employment, income, debt and assets. They’ll look at your savings, checking, 401k and IRA accounts, tax returns and other records of income, as well as your debt-to-income ratio. They want to see that you, and any co-borrowers, have the ability to make the payments both now and in the future.
Using the current market value of the home, the underwriter will make sure it serves as ample collateral for the loan. This assures the lender that they can recover the unpaid balance in the case of a default. The underwriter may use an appraisal or other form of valuation to assess the home’s worth.
Step 1: Complete your mortgage application.
The first step is to fill out a loan application. The information you provide will help determine if you’re eligible for a loan. Since every situation is unique, the exact documents you’ll need may vary. You’ll likely need to provide:
- ID and Social Security number
- Pay stubs from the last 30 days
- W-2s or I-9s from the past two years
- Proof of any other sources of income
- Federal tax returns
- Recent bank statements or proof of other assets
- Details on long-term debts such as car or student loans
- Real estate property information/Accepted Offer to Purchase (signed by all parties)
Our online application process is a safe and secure way to get started on your mortgage application from your smartphone or computer. After you sign up, you’ll answer simple questions along a guided path and easily import or upload documents. You can start your application on your own, or with the help of a mortgage loan officer. Within three business days of submitting your complete application, your lender will deliver a Loan Estimate (LE) showing your estimated closing costs.
What Exactly Does An Underwriter Do With Your Mortgage?
FAQ
What kind of questions do underwriters ask?
Based on their review, an underwriter may ask for additional documentation, information or explanation about your credit, income, or employment history.
What are the 3 C’s of underwriting?
This important step in the process focuses on the three C’s of underwriting — credit, capacity and collateral.
What to avoid during underwriting?
Respond Promptly: If the underwriter requests additional information, respond quickly to keep the process moving. Avoid Major Financial Changes: Refrain from making significant financial changes, like large purchases or changing jobs, during the underwriting process.
What gets you denied in underwriting?
The key reasons underwriters reject mortgages often involve credit score issues, income shortfalls, high LTV ratios, property type or recent changes in your financial situation.