Here's What Happens When Your Mortgage Loan Is Sent to Underwriting

When you want to buy a home, you should get pre-approved for a mortgage. This means providing your financial details to a mortgage lender that will determine if you can borrow, how much it will lend you, and what interest rate it will charge you to do so.

Getting pre-approved doesn't mean that you are definitely going to get a home loan, though. After you have gone through the pre-approval process and made an offer on a home, you have to submit your formal application, and your loan will go to underwriting.

What exactly does that mean, though? Here's what happens when your loan goes to underwriting.

This is how the mortgage underwriting process works

When your mortgage loan application is sent to underwriting, it goes to a professional whose job it is to assess risk. The underwriter's goal is to review your financial credentials in detail to determine the likelihood you'll be able to repay the loan and to make sure that the home you're buying acts as sufficient collateral for the loan.

During the underwriting process, the underwriter is going to ask for many documents and will review them in detail. This may include:

• Pay stubs
• Tax returns
• Proof of all income sources
• Bank statements
• Brokerage account statements
• Credit reports
• A home appraisal
• Loan statements

The underwriter's goal is to determine:

• If the home is worth enough to serve as collateral for the loan and is structurally sound
• If you have enough income to pay your mortgage, housing costs, and any other debts you have.
• If your income is stable and unlikely to change.
• If you'll be using the home for the stated purpose (such as using it as a primary home or investment property)
• If you are likely to be a responsible borrower
• If you have sufficient funds for a down payment and closing costs and where those funds came from (to ensure they aren't an undisclosed loan that you'd have to pay back).

The process of reviewing all of your information to determine these answers can take several weeks, and you may be asked to provide an explanation of bank deposits, proof of employment, or a host of other information during the process.

Will your loan be denied in underwriting?

By the time your loan gets to underwriting, you stand a pretty good chance of approval. After all, the lender has already reviewed your financial credentials and determined you are likely qualified.

However, there's no guarantee that you'll definitely get your loan. In fact, around 9.3% of mortgage loan applications were denied in underwriting in 2020, according to the Home Mortgage Disclosure Act. And some kinds of loans have higher denial rates, including:

• Jumbo loans, which had around an 11% denial rate
• FHA loans, which had around a 14.1% denial rate
• Refinance loans, which had around a 13.2% denial rate

For conventional conforming loans, on the other hand, the denial rate was the lowest (at about 7.6%). A conventional loan is one that is not backed by the government and isn't large enough to be classified as a jumbo loan.

You may be among those who are denied if:

• Your credit score is lower than the lender requires.
• You have more debt than the lender will accept.
• There's a problem with the home you're buying, such as a health and safety issue (like a roof without any life left).
• The home appraised too low.
• You don't have enough money to use for a down payment or closing costs.
• Your employment situation has changed or is unstable.

If you are denied, your lender should tell you why, and you can work to correct the issue (for example, if you have too much debt, you could pay down some of it and try to re-apply again). You also have the option to try to apply with a different lender whose requirements may not be as stringent, but this would mean starting the entire application process over.

A denial can be a huge disappointment, but remember that underwriters are paid to assess risk. If a professional has found there is a high chance you'll default on a home loan, you should take the time to think about whether you're really ready to move forward with purchasing right now, or whether you should work to improve your overall financial situation first.