Mortgage Underwriting Process: How It Works, and How Long It Takes

We get more questions about the mortgage underwriting process than any other home loan topic. What is underwriting? What does the underwriter do? How long does the process take on average? Can my loan be turned down during the underwriting process, even though I’ve been pre-approved by the lender already?

These are just a few of the questions we will answer in today’s mortgage tutorial.

Definition: Mortgage Underwriting in Plain English

Mortgage underwriting is a process through which lenders (A) measure the risk associated with a certain loan, and (B) ensure that the loan complies with the lender’s minimum guidelines.

It is the underwriter’s job to determine if the risk of lending to a particular borrower is acceptable. He does this by examining the borrower’s credit score, debt-to-income ratios, employment and income documents, and all other financial documents included in the loan package. During this process, the underwriter will ensure that the borrower meets the requirements set forth by the lender, as well as the requirements of the federal government and the secondary mortgage market, if applicable.

In addition to using their own internal guidelines, most lenders adhere to the underwriting guidelines established by Freddie Mac and Fannie Mae. Their goal is to generate “conforming loans” (i.e., loans that conform to Fannie Mae’s and Freddie Mac’s guidelines), as these loans can be sold into the secondary mortgage market.

The mortgage underwriting process will generally produce one of three outcomes:

  1. Green light — The loan might be approved with no conditions whatsoever. This is the ideal scenario, from the borrower’s perspective.
  2. Yellow light — The borrower might receive a “conditional approval.” This is when the underwriter gives the borrower certain conditions that must be met, before a final approval can be issued. An example of a mortgage condition would be a letter of explanation for a certain bank transaction or credit issue. In this case, the borrower would simply write the letter explaining whatever it was the underwriter wanted to know, ideally resolving the issue. The underwriter will review the additional documents and/or explanations provided by the borrower, and then do one of three things: (1) clear the loan for closing, (2) give the borrower additional follow-up conditions, or (3) reject the loan for some reason.
  3. Red light — The loan might be turned down for some reason determined by the underwriter. At this point, there’s not much the borrower can do but apply for a loan elsewhere, or address the items that led to rejection.

The “yellow light” scenario is very common these days. Lenders are more strict today than they were during the housing boom. So there’s a higher probability the mortgage underwriting process will produce one or more conditions to approval.

Read: 10 common problems the underwriter might uncover

How Long Does It Take?

So, how long does the mortgage underwriting process take? It varies quite a bit actually, because every applicant is different. Underwriting can take anywhere from a few days to a few weeks. One to two weeks is a common time frame. When you consider all of the different conditions that can arise during the “yellow light” scenario mentioned above, you can understand why there is so much variance.

  • Some borrowers have no conditions and sail through the mortgage underwriting process in a matter of days.
  • Some borrowers get one or two conditions from the underwriter, which must then be addressed and “cleared” before the loan can proceed to closing. This can add a few more days onto the process.
  • Other borrowers get a long list of conditions from the underwriter. This is where things can get bogged down, sometimes for two weeks or more. It also depends on how quickly the borrowers can provide the requested items (additional documents, letters of explanation, etc.).

As you can see, there are many variables that affect both the length and difficulty of the mortgage underwriting process.

The Home Stretch: What Happens After Underwriting?

If the underwriter determines that the loan is an acceptable risk based on the lender’s guidelines (and it conforms to other external requirements, such as FHA, VA, or Freddie Mac), he will give it a green light. In industry jargon, this is referred to as being “clear to close.” You have cleared the mortgage underwriting process, and you are now on track to close the deal.

At this stage, the lender will have the closing documents prepared. This is usually done by an escrow company or specialist. It is the escrow company that prepares all of the documents that need to be signed during the closing process. But we are getting beyond the scope of this article.

Summary: This article explains how the mortgage underwriting process works, and how long it can take. This process varies widely from one borrower to the next. Some borrowers get through it in a matter of days with no additional “hoops” to jump through. Other borrowers get a list of conditions that need to be met, while others get turned down cold. There are many variables. As a result, the process can take anywhere from four days to four weeks — or even longer. As a borrower, the best thing you can during the mortgage underwriting process is (A) stay in touch with your loan officer, and (B) resolve any conditions that may arise as quickly as possible.