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What Is Loan Underwriting?

December 22, 2020


Buying a home can be equal parts exciting and stressful. For first-time homebuyers, the process can be complicated and involve a lot more than just finding your dream neighborhood and house. And then there’s loan underwriting, one of the essential steps on your real estate journey. 

During the mortgage loan application process, the lender reviews the borrower’s financial history to verify their ability to make the monthly payments. This process determines if the borrower should be offered credit – and at what interest rate. This rate can make a critical difference in the monthly payments and the total amount owed.

This checklist can help you get started gathering the specific paperwork for your loan application:

  • Current pay stubs
  • W-2s from the last two years
  • Federal tax returns from the previous two years
  • Bank statements from the previous 60 days
  • Addresses where you’ve lived in the past two years
  • Employer contact information for the previous two years

Ultimately, underwriting aims to make sure that you don’t end up with a mortgage you can’t afford.

What Is a Mortgage Underwriter?

Think of this person as your financial detective. A mortgage underwriter is an expert who will learn the ins and outs of your money – how much you have, where you get it from as well as how you spend and save it.

The following is a list of the specific information the mortgage underwriter will need to consider and the role this information plays in determining your financial stability.

Credit score and credit report

These reports will allow the lender to look at your credit history, including payment history and your accounts’ ages. Your underwriter will also document the overall scores the three major credit bureaus assign to you. This will include any late payments, bankruptcies, or a pattern of credit overuse.

Income and employment

For most people, income and employment are significant factors in their ability to make monthly payments. The underwriter will reach out to your employer to verify your employment information. A recent change in job status can significantly impact a lender’s decision to approve the loan.

Debt-to-income ratio

Lenders need to consider existing debt for borrowers. Even if your job seems to show adequate income to make monthly mortgage payments, other debt could put that into jeopardy. That includes credit card debt, car loans, and even student loans.

To calculate your debt-to-income ratio, add up all your monthly debt payments, and divide them by your gross monthly income. Lenders like to see that number at less than 36%. The higher the ratio, the more likely a borrower will run into trouble making monthly payments.

Down payment and savings

The underwriter will also ask for bank statements dating back a few months. These statements help them ascertain the source of your down payment, spending history, and savings.


To get a clear picture of your entire financial history, the loan underwriter must know all your assets. That includes checking and savings accounts, personal property (like cars), stocks, and any other real estate in your name. Closing costs can account for as much as 6% of the loan price, so assets will be used to make sure mortgage payments can be made after closing costs.

Tax returns

Lenders want to see two years’ worth of tax returns, including the income and any payments made. For many people, that includes W-2s, but for those who are self-employed or work freelance will need to provide other documentation.

401k accounts

It’s important to note that 401k accounts will not be considered part of your debt-to-income ratio in traditional loans. These accounts won’t appear on your credit report either. The IRS prohibits using funds from a 401k as collateral for a loan.

Underwriting Timelines

The process involves a lot of paperwork – the mortgage application isn’t something that can be rushed. How quickly it goes will depend, at least in part, on how fast the borrower can provide all the necessary documentation.

For the underwriting work to go as quickly as possible, respond to your loan officer’s questions as soon as possible. The lender may contact you for any additional financial documents, and the loan cannot be approved until that information is provided. Some of those extra documents may even be letters explaining any abnormalities in your financial history.

The loan process can happen as quickly as a few days. Still, any delay in handing over documentation can add extra time and uncertainty during an already stressful process.

The Importance of the Appraisal

Underwriters assess how much of a risk a lender will take on if they decide to give you a loan. For that reason, they can order an appraisal to make sure the home value matches up with the loan amount.

An appraisal protects both you and the mortgage lender from overpaying for a home.

An appraiser will methodically walk through the home, taking notes, measurements, and photographs as they go. Their job is to evaluate the condition and features of the property. Much like agencies that assess property values, they will then compare that home to others in the area. Those are called “comps” and are meant to assure a fair value is placed on the house.

This is important because the appraisal value is directly connected to your mortgage amount. If it appears you are overpaying for the home, the loan may be rejected.


Your underwriter is your financial detective, and detectives need all the information they can get in. Being transparent, and providing all the required documentation, will help the process go smoothly.

No matter what happens, be patient. The underwriting process often includes more than one person and can require many steps, so it doesn’t happen overnight. In the end, you should have what you need to get into a new home.

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