What Is Loan Underwriting?

Kristie Lorette McCauley
Filling out mortgage application

When you apply for mortgage financing, you quickly become familiar with the term "loan underwriting." Loan underwriting is the final part of processing the mortgage application before closing. The person performing this part of the mortgage process is known as the underwriter. The underwriter completes a final review of the mortgage file to ensure that everything meets the lender's requirements.

Underwriting Process

The underwriting process involves a final review and evaluation of all of the documents you submit with your mortgage application. During the underwriting process, the underwriter determines if you meet all of the requirements the lender sets for borrowers to qualify for the loan. Additionally, they review the other legal documents that are part of the closing process.

The Application

The underwriter uses the application you submit for informational purposes. Using the application as a guide, the underwriter goes through the process of verifying all of the information you have included on the application. This information includes, but is not limited to:

  • Name
  • Address
  • Current Employer
  • Income
  • Debts/Liabilities

The Credit Report

During the underwriting process, the underwriter pulls a credit report for each borrower listed on the loan application. First, the underwriter compares debts and liabilities the borrowers list on their application to what they find on the credit report. The underwriter can question any discrepancies between the credit report and the debts and liabilities the applicants list on the application. The underwriter also makes sure the applicant has not obtained more debt than they can handle since the initial application and credit review.

The Risk

The underwriter evaluates how creditworthy the applicants are. In other words, the underwriter is assessing how low or high of a risk the borrower is. The underwriter uses the income of the borrower, along with the debts and liabilities to evaluate the borrower's ability and willingness to repay the loan.

Applicants with good credit scores and sufficient income to repay the loan are deemed less risky as borrowers than those with low credit scores or low income that is not sufficient to cover the repayment of the loan.

The Appraisal

Once an appraisal is done on the property, this document also goes to the underwriter as part of the loan file. The underwriter is looking to see the market value of the collateral, which is the house that is being used for the mortgage loan. They are ensuring that the collateral is in good condition and that the value is higher than the loan amount (in cases where 100% financing is not available).

Title Work

Title work is also pulled for the property and submitted to the underwriter. Title shows the legal ownership of the property. The underwriter is making sure that the lender is receiving the proper lien position on the home when they fund the loan, so that old lien holders do not receive funds prior to the current lender in the case of default.

The underwriting process also includes verifying ownership of the property so that it changes hands from the current owner to the buyer, or verifies that the borrower is the owner in a case of a refinance.

Going to Closing

Once the underwriter completes the final approval of the file, you can head to the closing table. The underwriting process acts as protection for the all of the parties involved in the transaction. The lender wants to ensure that they are lending to a borrower that is likely to repay the loan and that the property value is high enough to warrant the loan amount. The process also ensures that the borrower is financing a worthy home and that the proper title or ownership is recorded for the property.

What Is Loan Underwriting?