slug: mortgage-underwriting-process

The Mortgage Underwriting Process: What Lenders Really Look for When Approving Your Loan

You've found your dream home, your offer was accepted, and you've applied for a mortgage. Now comes one of the most critical—and often misunderstood—steps in the home buying process: underwriting.

Mortgage underwriting is where a trained professional evaluates your financial profile to determine if you're a good risk for a mortgage loan. It's the difference between pre-approval (which is based on preliminary information) and final approval (which requires thorough verification).

Understanding what underwriters look for and how to prepare can mean the difference between a smooth closing and unexpected complications or even denial.

What Is Mortgage Underwriting?

Mortgage underwriting is the process of assessing the risk associated with lending you money. An underwriter—a trained professional employed by or contracted with your lender—reviews your financial documents, credit history, employment status, and the property you're purchasing to answer one fundamental question:

"Will this borrower be able to repay this loan?"

The underwriter's job is to verify everything you've stated on your application and ensure you meet the lender's lending criteria and the requirements of the loan program (conventional, FHA, VA, USDA, etc.).

The Three C's of Underwriting

Underwriters evaluate three primary areas, often called the "Three C's":

1. Capacity (Can you afford the loan?)

Capacity refers to your ability to repay the loan based on your income, employment, and existing debts. Underwriters assess:

Income Verification:

• W-2s from the past two years
• Recent pay stubs (typically last 30 days)
• Tax returns (especially for self-employed borrowers)
• Other income sources (rental income, alimony, Social Security, etc.)

Employment Verification:

• Two-year employment history
• Current employment status (they'll contact your employer)
• Job stability in the same field or industry

[Debt-to-Income Ratio](/blog/dti-ratio-explained) (DTI): This critical calculation compares your monthly debt obligations to your gross monthly income:

DTI = (Total Monthly Debt Payments ÷ Gross Monthly Income) × 100

Most conventional loans require a DTI below 43-50%, though requirements vary by loan program and lender.

Example:

• Gross monthly income: $8,000
• Proposed mortgage payment (PITI): $2,000
• Car payment: $400
• Credit card minimum payments: $200
• Student loan payment: $300
• Total monthly debt: $2,900
• DTI: ($2,900 ÷ $8,000) × 100 = 36.25%

This borrower falls well within acceptable range.

2. Credit (Do you manage debt responsibly?)

Your credit history reveals patterns of how you've managed debt in the past. Underwriters examine:

Credit Score:

• Minimum scores vary by loan type (typically 620+ for conventional, 580+ for FHA)
• Higher scores may qualify for better rates
• All three bureaus (Equifax, Experian, TransUnion) are pulled; lenders typically use the middle score

Payment History:

• Late payments, especially recent ones, raise red flags
• Collection accounts and charge-offs require explanation
• Bankruptcy and foreclosure have waiting periods before you can qualify

Credit Utilization:

• Using more than 30-40% of available credit can be concerning
• Recent credit inquiries are reviewed
• Opening new accounts during underwriting is problematic

Derogatory Marks:

• Judgments, liens, and collections must often be resolved before closing
• Some items require written explanations (Letter of Explanation - LOE)

3. Collateral (Is the property worth the loan amount?)

The home you're purchasing serves as collateral for the loan. If you default, the lender can foreclose and sell the property to recover their money. Therefore, they need assurance the property's value supports the loan.

Appraisal:

• Professional appraiser evaluates the property's market value
• Compares the home to recently sold comparable properties
• Identifies any safety or structural issues

Loan-to-Value Ratio (LTV): LTV compares the loan amount to the property's appraised value:

LTV = (Loan Amount ÷ Appraised Value) × 100

Lower LTVs represent less risk. Most conventional loans require 80% LTV or less to avoid [private mortgage insurance](/blog/mortgage-insurance-pmi-guide) (PMI).

Example:

• Purchase price: $500,000
• Down payment: $100,000 (20%)
• Loan amount: $400,000
• Appraised value: $500,000
• LTV: ($400,000 ÷ $500,000) × 100 = 80%

If the appraisal comes in low (say, $475,000), the LTV calculation changes:

• LTV: ($400,000 ÷ $475,000) × 100 = 84.2%

This higher LTV might require PMI or a larger down payment.

The Underwriting Timeline

Understanding the timeline helps you plan and reduces anxiety during the process.

Stage 1: Initial Review (Days 1-3)

Once you've submitted your application and initial documents, the underwriter performs a preliminary review. They're checking that:

• Your file is complete
• Information matches across documents
• No obvious red flags exist

Common outcome: A request for additional documentation.

Stage 2: Conditional Approval (Days 4-10)

After reviewing all documents, the underwriter issues a "conditional approval"—approval subject to meeting specific conditions. These conditions might include:

• Providing bank statements showing sufficient reserves
• Written explanation for a credit inquiry
• Proof that collections have been paid
• Updated pay stub closer to closing
• Clear title report from the title company
• Satisfactory appraisal

Don't panic about conditions—they're normal. Most loans receive conditional approval initially.

Stage 3: Clear to Close (Days 10-20+)

Once you've satisfied all conditions, the underwriter issues "clear to close" status. This means:

• All verifications are complete and satisfactory
• The appraisal supports the loan amount
• Title is clear
• You're approved for closing

However, even after "clear to close," you must maintain your financial status. Underwriters often re-verify employment and credit just before closing.

Stage 4: Final Underwriting Review (1-2 days before closing)

Immediately before closing, the underwriter performs a final quality control check:

• Re-verification of employment (VOE)
• Final credit check (to ensure no new debts)
• Review of final closing disclosure
• Confirmation that nothing has changed

Critical warning: Major financial changes between conditional approval and closing can derail your loan.

Common Underwriting Red Flags

Certain situations almost always trigger additional scrutiny or conditions:

Large Deposits

Any deposit larger than 50% of your monthly income requires documentation. Underwriters need to verify these aren't additional loans (which would increase your DTI).

How to handle it:

• Provide clear documentation (copies of checks, transfer records, gift letters)
• Avoid large cash deposits—they can't be easily verified
• If it's a gift, the donor must provide a gift letter stating it doesn't require repayment

Recent Job Changes

Changing jobs during the mortgage process is risky. Underwriters prefer two years of stable employment.

Better scenario: Same industry, higher pay, salaried position Problematic scenario: Different industry, commissioned/variable pay, probationary period

If you must change jobs, do it early in the process and notify your loan officer immediately.

Self-Employment

Self-employed borrowers face stricter scrutiny because income can be variable. Expect to provide:

• Two years of personal tax returns
• Two years of business tax returns (all schedules)
• Year-to-date profit and loss statement
• Business license
• CPA letter verifying income

Underwriters often average your income over two years. If income is declining, this could be problematic.

Recent Credit Inquiries

Multiple credit pulls during underwriting suggest you might be taking on additional debt. While [mortgage shopping](/blog/how-to-get-lowest-mortgage-rate) (multiple mortgage inquiries in a short period) is treated as one inquiry, other credit applications raise concerns.

Avoid:

• Applying for credit cards
• Financing furniture or appliances
• Buying a car
• Co-signing loans

Insufficient Reserves

Lenders want to see you have savings beyond your down payment and closing costs. Reserve requirements vary but typically range from 2-6 months of mortgage payments.

Example: If your mortgage payment is $2,500, you might need $5,000-$15,000 in reserves after closing.

Investment properties and second homes often require larger reserves.

Undisclosed Debts

Omitting debts from your application—intentionally or accidentally—causes problems. Underwriters discover these through credit reports and bank statements.

Common overlooked debts:

• Student loans in deferment (often still count toward DTI)
• Co-signed loans (you're fully responsible)
• Child support and alimony
• IRS payment plans
• Debts on credit reports you don't recognize

Property Issues

Appraisal problems can halt underwriting:

• Property appraised below purchase price
• Health and safety issues (missing handrails, exposed wiring, roof damage)
• Title issues (liens, easements, boundary disputes)
• Property in flood zone without [flood insurance](/blog/hurricane-insurance-guide)

Some issues require remediation before closing; others may prevent loan approval entirely.

Different Loan Types: Varying Underwriting Standards

Underwriting requirements differ based on loan program:

Conventional Loans

• Stricter credit requirements (typically 620+ score)
• DTI limits around 43-50%
• More rigid income documentation
• PMI required if LTV > 80%
• Conforming loan limits apply

FHA Loans

• More lenient credit requirements (580+ for 3.5% down)
• Higher DTI allowed (up to 50%+ in some cases)
• Easier qualification for first-time buyers
• Mortgage insurance required regardless of LTV
• Property must meet minimum safety standards

VA Loans

• No minimum credit score (but lenders set their own minimums)
• No down payment required
• No mortgage insurance
• More flexible on debt and credit issues
• Certificate of Eligibility required
• Property must meet VA appraisal standards

USDA Loans

• Property must be in eligible rural area
• Income limits apply
• No down payment required
• More flexible credit requirements
• Guarantee fee (similar to mortgage insurance) required

[DSCR Loans](/blog/best-dscr-lenders-2026) (Debt Service Coverage Ratio)

At HonestCasa, we offer DSCR loans for real estate investors. These loans have unique underwriting:

• No personal income verification required
• Qualification based on property's rental income
• DSCR ratio compares rental income to mortgage payment
• Typically require larger down payments (20-25%+)
• Higher interest rates than owner-occupied loans
• Investment property experience helpful but not always required

The DSCR formula: DSCR = [Monthly Rental Income](/blog/best-cities-for-cash-flow-2026) ÷ Monthly Mortgage Payment (PITI)

A DSCR of 1.25 means rental income is 125% of the mortgage payment, providing a 25% cushion.

Automated Underwriting Systems

Many loans now go through automated underwriting systems (AUS) before human review:

• Fannie Mae's Desktop Underwriter (DU)
• Freddie Mac's Loan Prospector (LP)
• FHA's TOTAL Scorecard

These systems analyze your application and provide a recommendation:

• Approve/Eligible: Strong application
• Refer with Caution: Marginal application requiring careful review
• Refer: Doesn't meet automated criteria; manual underwriting needed
• Ineligible: Doesn't meet minimum requirements

An "Approve" from the AUS doesn't guarantee final approval—human underwriters still review everything and can override the system.

How to Prepare for Smooth Underwriting

Before Applying

1. Check your credit: Review all three bureau reports for errors
2. Calculate your DTI: Know if you're within acceptable limits
3. Gather documents: Don't wait until they're requested
4. Save for reserves: Having extra savings strengthens your application
5. Stabilize your employment: Avoid job changes if possible

During Underwriting

1. Respond quickly: When conditions are issued, provide documents promptly
2. Maintain status quo: Don't change jobs, make large purchases, or open new credit
3. Keep money in accounts: Don't transfer money between accounts unnecessarily
4. Communicate: Keep your loan officer informed of any changes
5. Be patient: Underwriting takes time; frequent calls won't speed it up

Documentation Checklist

Have these ready before applying:

Income Verification:

• Last 2 years W-2s
• Last 30 days of pay stubs
• Last 2 years tax returns (if self-employed, commissioned, or rental income)

Asset Verification:

• Last 2 months bank statements (all pages)
• Retirement account statements
• Investment account statements
• Gift letter and donor's bank statements (if applicable)

Credit:

• Explanations for any derogatory marks
• Proof of payment for collections (if required)

Property:

• Executed purchase agreement
• Property listing information
• HOA documents (if applicable)

Other:

• Copy of driver's license
• Proof of homeowner's insurance
• Divorce decrees (if applicable to income/debts)
• Bankruptcy discharge papers (if applicable)

When Underwriting Goes Wrong

Despite preparation, sometimes loans don't get approved. Common reasons:

Income Issues

• Insufficient income to qualify
• Income declining year-over-year
• Unable to document self-employment income
• Job loss during underwriting

Credit Issues

• Credit score drops during process
• Undisclosed debts discovered
• New derogatory marks appear
• Collections must be paid but insufficient funds

Property Issues

• Appraisal too low
• Property has safety issues
• Title problems discovered
• Property doesn't meet loan program requirements

DTI Issues

• New debts taken on during process
• Debts higher than initially disclosed
• Income calculated lower than expected

What to Do If Your Loan Is Denied

1. Request denial reasoning: Lenders must provide specific reasons
2. Get a copy of the denial letter: You'll need it for future applications
3. Work on the issues: Address credit problems, increase income, pay down debt
4. Consider alternative loan programs: You might not qualify for conventional but could for FHA
5. Look at alternative lenders: Different lenders have different overlays (requirements beyond program minimums)
6. Wait if necessary: Some issues (bankruptcy, foreclosure) require waiting periods

The Underwriter's Perspective

Underwriters aren't trying to deny your loan—they want to approve it. Their job is risk management. They're protecting:

• The lender from default risk
• The loan from violating program rules (which could cause it to be rejected when sold on the secondary market)
• You from taking on a loan you can't afford

Understanding this perspective helps you work with, rather than against, the underwriting process.

Conclusion

Mortgage underwriting is the most critical step between application and closing. While it can feel intrusive and stressful, it serves an important purpose: ensuring you can afford your loan and protecting all parties in the transaction.

Key strategies for success:

1. Prepare thoroughly: Gather documents before applying
2. Maintain stability: Avoid major financial changes during the process
3. Respond quickly: Address conditions promptly
4. Communicate openly: Keep your loan officer informed
5. Be patient: Quality underwriting takes time

At HonestCasa, we pride ourselves on transparent communication throughout the underwriting process. Whether you're applying for a traditional mortgage, HELOC, or DSCR loan for an investment property, our team guides you through every step, explaining what underwriters need and why.

Remember: conditional approval is normal, questions are expected, and most files that make it to underwriting eventually close successfully. Stay organized, be responsive, and maintain your financial status quo, and you'll navigate underwriting successfully.

Related Articles

• [Dscr Loan Closing Timeline Explained](/blog/dscr-loan-closing-timeline-explained)
• [Self Employed Mortgage Guide](/blog/self-employed-mortgage-guide)