Step 3: Underwriting
Underwriting is where your loan application gets thoroughly analyzed and verified. It's the lender's process of evaluating risk—determining whether to approve your loan and under what terms. Understanding underwriting helps you prepare better and avoid surprises.
What Is Underwriting?
Underwriting is the process where a lender evaluates:
- The Borrower - Can you afford this loan? Will you pay it back?
- The Property - Is it worth what you're paying? Does it meet guidelines?
- The Loan - Does the structure make sense? Is the risk acceptable?
Think of the underwriter as a detective, investigator, and risk analyst rolled into one. Their job is to protect the lender—and by extension, ensure you're not taking on more than you can handle.
What to Expect
| Stage | Duration | What Happens |
|---|---|---|
| File Assignment | 1-2 days | Underwriter receives your file |
| Initial Review | 2-3 days | First pass through all documents |
| Conditions Issued | Day 3-5 | List of items needed to proceed |
| Condition Clearing | 1-5 days | You provide additional items |
| Final Review | 1-2 days | Underwriter issues decision |
Total Timeline: 5-10 business days (varies by loan type and complexity)
The Underwriting Process
Phase 1: File Review
The underwriter examines your complete file:
Borrower Analysis:
- Credit report review
- Income calculation
- Employment verification
- Asset verification
- Debt-to-income calculation
Property Analysis:
- Appraisal review
- Title report review
- Insurance verification
- Condition assessment
Loan Analysis:
- Loan-to-value calculation
- Rate and terms verification
- Compliance checks
- Documentation completeness
Phase 2: Verification
Everything you claimed gets verified:
| Item | Verification Method |
|---|---|
| Income | Tax transcripts, VOE |
| Employment | Verbal verification |
| Assets | Bank statement review |
| Credit | Fresh credit pull |
| Property Value | Appraisal |
| Title | Title search/report |
Phase 3: Risk Assessment
The underwriter evaluates overall risk:
- Does income support the payment?
- Is the property worth the loan amount?
- Is the borrower's credit profile acceptable?
- Does the loan meet investor guidelines?
- Are there any red flags?
Phase 4: Decision
One of three outcomes:
| Decision | What It Means |
|---|---|
| Approved | ✅ Loan approved as submitted |
| Approved with Conditions | ⚠️ Approved pending additional items |
| Suspended/Denied | ❌ Cannot approve (reasons provided) |
Most loans receive "Approved with Conditions" initially—this is normal!
What Underwriters Look For
Credit Analysis
Credit Score:
- Score meets program minimums
- No recent derogatory items
- Stable credit history
Credit History:
- Payment patterns
- Bankruptcies, foreclosures, short sales
- Collections or charge-offs
- Credit utilization
Red Flags:
- ❌ Late payments in last 12 months
- ❌ Recent new credit inquiries
- ❌ Maxed-out credit cards
- ❌ Disputed accounts
Income Analysis
For W-2 Employees:
Base Salary
+ Overtime (if consistent 2+ years)
+ Bonus (if consistent 2+ years)
+ Commission (if consistent 2+ years)
= Total Qualifying Income
For Self-Employed:
Net Business Income (from tax returns)
+ Add back: Depreciation
+ Add back: Other non-cash deductions
÷ 24 months
= Monthly Qualifying Income
What They Verify:
- Employment still active
- Income matches documents
- Stability of income
- No gaps in employment
Asset Analysis
Down Payment Verification:
- Source of funds documented
- Funds seasoned (in account 60+ days)
- No undisclosed borrowing
- Gift funds properly documented
Reserves:
- Months of payments available after closing
- Liquid assets verified
- Retirement accounts considered at 60-70%
Red Flags:
- ❌ Large unexplained deposits
- ❌ Insufficient seasoning
- ❌ Borrowed down payment (undisclosed)
Property Analysis
Appraisal Review:
- Value supports purchase price
- Comparable sales appropriate
- Property meets guidelines
- No condition issues
Title Review:
- Clear title (no liens, judgments)
- Legal description matches
- Ownership chain verified
- No boundary issues
Understanding Conditions
What Are Conditions?
Conditions are items the underwriter needs before giving final approval. They're requests for:
- Additional documentation
- Clarification on existing docs
- Verification of specific items
- Resolution of discrepancies
Types of Conditions
Prior-to-Document (PTD): Must be satisfied before loan docs are drawn
- Updated bank statement
- Letter of explanation
- Additional income verification
Prior-to-Funding (PTF): Must be satisfied before funds are released
- Final verification of employment
- Clear title
- Insurance binder
Post-Closing: Must be satisfied after closing
- Recorded deed
- Final title policy
Common Conditions
| Condition | What's Needed |
|---|---|
| Letter of Explanation (LOE) | Explain credit event, deposit, or gap |
| Updated Bank Statement | More recent statement showing funds |
| Proof of Insurance | Insurance binder or declaration page |
| VOE (Verification of Employment) | Verbal confirmation you still work there |
| Additional Pay Stub | Most recent pay stub |
| Tax Transcript | IRS verification of tax return |
| Gift Letter | Documentation if receiving gift funds |
| Appraisal Correction | Fix errors in appraisal report |
Responding to Conditions
Do:
- ✅ Respond quickly (time kills deals)
- ✅ Provide exactly what's requested
- ✅ Include cover explanation
- ✅ Ask for clarification if confused
Don't:
- ❌ Ignore conditions
- ❌ Provide partial information
- ❌ Argue with the underwriter
- ❌ Wait until the last minute
Automated vs. Manual Underwriting
Automated Underwriting (AU)
What It Is: Computer system that evaluates your loan application instantly.
Common Systems:
- DU (Desktop Underwriter) - Fannie Mae
- LP (Loan Prospector) - Freddie Mac
How It Works:
Application Data Submitted
↓
Algorithm Analyzes Risk
↓
Recommendation Issued
↓
Approve/Eligible OR Refer/Caution
Findings:
| Result | Meaning |
|---|---|
| Approve/Eligible | ✅ Meets automated guidelines |
| Refer/Caution | ⚠️ Needs manual review |
| Out of Scope | ❌ Doesn't fit automated parameters |
Manual Underwriting
What It Is: Human underwriter reviews everything personally, without automated approval.
When It's Required:
- Non-QM loans (DSCR, bank statement, etc.)
- Automated system returns "Refer"
- Complex income situations
- Unique property types
- Credit events requiring explanation
Manual Underwriting is Thorough:
- Every document scrutinized
- More conditions typically issued
- Takes longer but more flexible
- Can approve scenarios automation rejects
Red Flags That Cause Delays
Income Red Flags
- ❌ Inconsistent income across documents
- ❌ Declining income year-over-year
- ❌ Undisclosed employment changes
- ❌ Self-employment less than 2 years
- ❌ Large business losses on tax returns
Credit Red Flags
- ❌ Recent late payments (especially mortgage)
- ❌ New debt opened during process
- ❌ Disputed accounts on credit report
- ❌ Identity issues (name variations, addresses)
- ❌ Bankruptcy or foreclosure in recent past
Asset Red Flags
- ❌ Large deposits without explanation
- ❌ Insufficient funds for closing
- ❌ Overdrafts in bank statements
- ❌ NSF (non-sufficient funds) charges
- ❌ Borrowed funds not properly disclosed
Property Red Flags
- ❌ Appraisal issues (value, condition, comparables)
- ❌ Title problems (liens, judgments, clouds)
- ❌ Insurance issues (uninsurable property)
- ❌ Zoning violations or unpermitted work
- ❌ Environmental concerns (flood zone, contamination)
Tips for Smooth Underwriting
Before Underwriting Begins
-
Don't change anything
- No new credit accounts
- No large purchases
- No job changes
- No large deposits without paper trail
-
Keep documents current
- Bank statements within 30 days
- Pay stubs within 30 days
- Stay ready for updates
-
Be reachable
- Answer calls promptly
- Check email daily
- Respond to conditions same-day if possible
During Underwriting
-
Respond quickly to conditions
- Time kills deals
- Rate locks expire
- Sellers get impatient
-
Provide complete information
- Include all pages
- Explain anything unusual
- Don't leave questions unanswered
-
Stay calm
- Conditions are normal
- Most files get approved
- Your loan team is on your side
What NOT to Do During Underwriting
- ❌ Don't apply for new credit
- ❌ Don't make large purchases
- ❌ Don't deposit cash (can't source it)
- ❌ Don't change jobs
- ❌ Don't move large sums between accounts
- ❌ Don't co-sign for anyone
- ❌ Don't close any accounts
What Comes Next
After underwriting is complete:
If Approved: → Step 4: Lender Matching (if not already matched) → Step 5: Approval (commitment letter)
If Conditions Remain: → Clear conditions and return for final review
If Denied: → Receive explanation and work with MoneyMatcher on alternatives
Frequently Asked Questions
Q: How long does underwriting take?
A: Typically 5-10 business days, but can be faster (3-5 days) or longer (2-3 weeks) depending on complexity and condition response time.
Q: Why do underwriters ask for so many conditions?
A: Underwriters must verify everything to regulatory standards. What seems excessive protects everyone—you, the lender, and the system.
Q: Can I talk directly to the underwriter?
A: Usually not. Communication goes through your loan officer or MoneyMatcher team. This ensures proper documentation of all exchanges.
Q: What if my appraisal comes in low?
A: Options include: renegotiate price, bring more cash, contest appraisal, or cancel. Your team will guide you through options.
Q: Will a credit inquiry during underwriting hurt me?
A: Yes, potentially. New credit inquiries can trigger a new credit pull and potentially change your approval status. Avoid new credit applications.
Need Help?
Questions about underwriting?
- 📧 Email: support@moneymatcher.io
- 📞 Phone: (555) 123-4567
- 💬 Live Chat: Mon-Fri 9am-6pm EST
We're here to guide you through every step!
Related Pages
- Step 4: Lender Matching - How we find your lenders
- Document Checklist - What documents you need
- FAQ - Common questions answered