What Is Underwriting: Understanding the Mortgage Underwriting Process

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Loan underwriting is a crucial step in many loan approval processes, particularly for a mortgage or home equity line of credit. Real estate investors will likely go through many loan underwriting processes in their careers, so it’s important to understand how it works and what to expect— especially since an initial preapproval letter isn’t the same as being cleared to close. 

So what is underwriting, what is a mortgage underwriter, and how exactly does the process work? We’ll answer all these questions about the loan underwriting process and more so you’ll be ready. 

What Is Underwriting In Real Estate?

Underwriting is the process where underwriters review a prospect’s application; in many cases, they assess financial risk. 

The mortgage underwriting process, for example, includes loan underwriters doing a thorough review of an applicant’s finances. 

Life insurance underwriting processes, meanwhile, often involve the insurance company asking about an applicant’s debt-to-income ratio, but it also involves an extensive focus on their family medical history and getting up-to-date medical records to issue an insurance policy. 

Different underwriting processes will require applicants to submit specific information, so knowing what to expect can help you ensure that you’re prepared upfront.  

What Does a Mortgage Underwriter Do? 

A mortgage underwriter conducts a risk assessment to determine whether you can afford the home loan you’ve applied for. 

Because underwriting is an extensive process and people’s financial situations can change quickly, underwriting happens after you go under contract for a home. 

As soon as you’re under contract, your mortgage lender—whether an investment bank, a credit union, or a broker—will reach out to ask for an abundance of information, which is likely to include:

• Any existing outstanding personal loans, including an auto loan, home equity lines of credit (HELOCs), or student loans 
• Up-to-date bank statements for every bank account you have, including retirement accounts
• Proof of down payment that you plan to use 
• Personal tax returns for the past two to three years 
• Business tax returns, if you own a business, for the past two to three years 
• Information surrounding credit card debt 
• Records of any monthly recurring payments, including alimony or child support 
• Your Social Security number and permission to run your credit report

The underwriter will verify your income, debt, and assets. They’ll factor in your credit score, existing debt, and factors like past missed payments to consider how much risk your application presents. 

They’ll also assess the property itself. This typically involves a title search to flag any significant issues like ownership concerns or liens. 

They’ll also hire an appraiser to review the house in person to determine the current in-market value of the property in question. No investment bank wants to offer a $400,000 mortgage on a home that’s ultimately only worth $300,000 because the financial risks are too high.

Does Underwriting Happen Before or After My Preapproval? 

Some first-time homebuyers (and first-time investment property owners) are confused when they go through the underwriting process after receiving a preapproval letter.

In today’s incredibly competitive market, coming to the table with a hefty down payment and a preapproval letter can be a huge advantage when it comes to submitting a winning offer on a property. 

During the preapproval process, a lender may quickly review information like stated debt-to-income ratio, bank statements, and income. They’ll let you know how much you could be approved for based on the information presented, but this does not involve the formal underwriting process. 

The underwriting process takes place once your offer is accepted, so a preapproval is not the same as officially being cleared to close by a mortgage lender.  

What Does the Underwriting Process Include? 

The mortgage underwriting process is a critical part of lenders assessing financial risk, so it’s no surprise that financial institutions will be thorough. Before lending money, the underwriting process will go through the following steps after your loan application is submitted and a property is under contract. 

Financial review

You, the borrower, will need to submit a handful of financial documents, including bank statements, pay stubs, and tax returns for financial review. They’ll check your credit score to look for all existing debt and to look at your financial history.

Be thorough. Include all bank accounts, including savings accounts, retirement accounts, investment accounts, and business accounts, if relevant. 

Factors like bankruptcy in the past seven years, consistently missed payments, or a low credit score could impact your ability to receive mortgage approval, even if you can otherwise afford the mortgage payments once the principle, interest rates, and escrow is added in. 

They’ll also ensure that your down payment is readily available, and that you have enough funds available for closing costs. 

If the lender is concerned about specific instances on an applicant’s credit history, you may need to submit a statement that explains what happened and—ideally—what you’ve done to prevent it from happening again. 

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 the initial financial review is complete, the lender will order an appraisal. This ensures 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 typically included 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.

If the appraisal comes in over the value of your offer, there’s nothing more you need to do.

If, however, the appraisal comes in under your offer, you may have some decisions to make. The lender will only lend up to the appraised value of the home, so you would need to cover the difference out of pocket or try to negotiate with the seller. 

Title search

The title specifies who has rights to the property. During underwriting, your lender will ensure 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 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

There are four possible outcomes for your home loan: approved, denied, suspended, or approved with conditions.

• Approval: You’ve been approved, and no further action is required.
• Denial: It’s rare you will be denied this late in the process unless your financial situation has changed since you applied for preapproval. 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 home insurance coverage, an appraisal, or a clear title report.

Once you’re approved, nothing is said and done until the paperwork is signed and you have the keys to your new home. Approval is contingent on your situation staying the same. Don’t open any new credit cards or loans, including auto loans, or you can put your approval at risk. 

Wait to go through with any major financial transactions until after you close on the property, unless doing so is a requirement by the lender for loan approval. 

Related: 10 Things to Look for in a Final Walkthrough

How Long Does the Underwriting Process Take? 

As with any part of the homebuying process, this varies depending on your personal financial situation. Do your part by handing over all the necessary documents to your lender as soon as possible. A 30-to-45-day window is typical for the underwriting process, though a decision can be made within a few weeks. In some cases, faster closing dates may be possible. 

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. 

You’ll likely need to resubmit much of the financial information you provided during the preapproval process, including updated bank statements. The underwriter’s job is to look at your current financial portfolio and cash flow. 

Where Can I Find an Underwriter? 

The lender you choose will automatically have a team of underwriters working for them. You may never work with the underwriter directly, as the lender (or your account representative) will request any necessarily documentation and communicating on your behalf. They will let you know if the underwriter has any questions or needs additional records. 

If you’re buying a property, the first step is often to find a good agent, as one can often recommend lenders well suited for your particular situation. 

BiggerPockets can help match with a real estate investment agent based on your property preferences, including the type, location, and price of the property in question. 

I’m Through Mortgage Underwriting: What’s Next?  

Aside from actually getting an offer accepted, making it through mortgage underwriting is one of the more stressful parts of buying a home. 

It’s important to remember that there are a few other steps involved in the homebuying process, including:

• You’ll need to obtain home insurance, predated to start the day you close on the property; there may be an insurance underwriting process to go through with this, so start early. 
• A property inspection is important to assess the condition of the home.
• The seller must sign documents agreeing to sell the home, which often happens either the day of or several days before the close date. 
• Maintain a good credit history, or whatever your current credit score is, and be ready to close with the down payment and closing costs. 

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