Underwriting 101: The Basics of Mortgage Underwriting

Cardinal Financial January 27, 2021 | 4 min read
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Underwriting can be confusing. For one thing, underwriters don’t actually write anything. But don’t be scared away by the intimidating name. In a nutshell, underwriting is simply the part of the home loan application process where your lender verifies the information you provided in your application. Let’s expand on that nutshell.

Lesson 1: An introduction to underwriting

Underwriting is the process of a lender verifying your income, assets, credit history, debt, and property details to determine if you are approved for your loan. This may not be the most exciting part of the mortgage process, so underwriting typically happens behind the scenes. The time it takes an underwriter to review can vary depending on the complexity of your financial history, how soon you submit the required documentation, and mortgage industry volumes.

Lesson 2: What underwriters do

The underwriting process typically starts after your application is submitted and your loan is locked. While your future home is getting appraised, underwriters take a close look at your financial background and determine how much of a risk your lender will be taking on if they choose to give you a loan. This might sound a little scary, but the process helps both sides. Ensuring borrowers can pay back their loans protects the borrowers from taking on too much debt and the lender from taking on unnecessary risks. When evaluating your financial situation, underwriters:

  • Check your credit history
  • Order an appraisal of your potential home
  • Verify your income and employment history
  • Check your debt-to-income ratio (DTI)
  • Comb through your financials to ensure that the down payment you’ve agreed to is manageable

While your loan is going through underwriting, it’s a good idea to stay in contact with your lender. And remember, don’t make any major decisions or purchases (like a new car or furniture) that will impact your financial picture. Any significant change in your finances means you’ll essentially have to start your application all over with the latest numbers.

Lesson 3: After the underwriter’s decision

The underwriting process concludes with one of three outcomes: final approval, conditional approval, and denial. Obviously, approval is the best outcome here. When your loan has final approval, you’re finished with processing and free to move on to closing. That means you’re one step closer to completing the loan process. Conditional approval happens when you’ve submitted all of the required documentation and it looks good for the most part, but the underwriter wants you to take care of a few more things before final approval. You may need to submit additional documents such as a letter of explanation, gift letters, or tax documentation to clear some things up for the underwriter. If a conditional approval is issued, there probably aren’t any major red flags standing in the way of your final approval. Denial isn’t the outcome we want to see, but it doesn’t mean you can never be a homeowner. Mortgage loans can be denied for a number of reasons, but a few of the most common are low appraisals, lack of down payment and closing funds, a high DTI, and low credit scores. All of which can be fixed over time! Talk with your loan originator to discuss your options. If you get denied, consider it a minor setback and take the initiative to save more money for a down payment and fix your credit. You can also look into home loan assistance if low income is what’s holding you back.

Underwriting lessons in review

What’s a lesson without a recap? Here are the key takeaways to remember about underwriting:

  • Underwriting is the process of your lender verifying your financial situation and double-checking to make sure your mortgage can be approved.
  • Underwriters don’t write, but they do check your income, assets, credit history, debt, property details, and loan amount to evaluate the risk of giving you a mortgage.
  • The time it takes to underwrite your loan can vary, but being prepared and having your paperwork submitted as quickly as possible can go a long way in speeding up the process.
  • The underwriting process can result in your mortgage being approved, conditionally approved, or denied.

If this was an actual class, we’d give you an A. And even though it’s not an actual class, our office hours are 24/7 for questions you may have about underwriting or any other part of the home loan process.

There’s no writing in underwriting. The more you know.

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