Definition
Underwriting is the process lenders use to assess a borrower’s financial profile and determine their eligibility for a mortgage loan. The underwriter evaluates credit history, income, debt-to-income ratio (DTI), employment status, and property value to ensure the borrower meets the lender’s requirements.
Explanation
Underwriting is a critical step in the mortgage approval process, ensuring that the lender takes on an acceptable level of risk when approving a loan. The underwriter verifies:
- Creditworthiness – Reviews the borrower’s credit score and history to assess their repayment reliability.
- Income & Employment – Ensures the borrower has a stable income source and sufficient earnings to cover the mortgage.
- Debt-to-Income Ratio (DTI) – Evaluates the borrower’s existing debts compared to income, ensuring they can handle the new mortgage.
- Appraisal & Property Value – Confirms that the home’s market value supports the loan amount, reducing the lender’s risk.
- Loan Program Requirements – Verifies compliance with FHA, VA, conventional, or jumbo loan guidelines.
If an issue arises, the underwriter may request additional documentation, such as pay stubs, tax returns, or proof of assets. After completing the review, they issue one of three decisions:
- Approved – The loan is fully approved.
- Conditional Approval – The borrower must provide additional documents before final approval.
- Denied – The borrower does not meet the lender’s criteria.
Example
A homebuyer applies for a $400,000 mortgage with a credit score of 720 and a 20% down payment. The underwriter:
- Confirms their employment and income through W-2s and bank statements.
- Reviews their DTI ratio (35%) to ensure affordability.
- Approves the loan, pending the appraisal confirming the property is worth at least $400,000.