Loan underwriting is a process that lenders use to assess your credit risk and decide whether to issue loans such as mortgages, personal loans, auto loans, and private student loans. The personal documents required for the underwriting process vary by type of loan.
If you’ve ever been pre-approved for a loan and had to wait for final approval, you probably have a good idea of what the underwriting process looks like. During this process, you likely had to submit lots of financial information to your creditors, including details about your income, existing debt, and sometimes, your assets.
Lenders put you through the underwriting process because they need to fully vet your creditworthiness before they give you any money. If lenders don’t check your financial information for red flags, assess your credit, and determine the likelihood you’ll repay the loan, the lender could expose itself to too much risk of borrower default.
Although the underwriting process can be a pain, it helps to know what to expect so you’re prepared and can have your documents ready. This guide to loan underwriting can help you learn more about what creditors will look for when deciding whether to give you a loan.
On this page:
- What is Underwriting?
- What Does the Loan Underwriting Process Look Like?
- What Information Do I Need to Gather During the Loan Underwriting Process?
- How Long Does Underwriting Take?
What is Underwriting?
As the Federal Deposit Insurance Corporation (FDIC) explains, “Underwriting is the process by which the lender decides whether an applicant is creditworthy and should receive a loan.”
Effective underwriting requires a comprehensive assessment of how risky you are as a borrower and is a huge part of the loan application process. Lenders need to do underwriting for all types of loans, including student loans, personal loans, mortgages, and small business loans.
Lenders have a lot to consider during the underwriting process to determine if you’re likely to pay back your loan or if you’re at significant risk of defaulting and damaging their profit margins. Some of the key factors lenders consider include:
- Your credit report: If you’ve got a good credit score and a history of on-time payments, you’re a less risky borrower and lenders will be more likely to lend to you.
- Your income: Lenders want to see you have a steady income and have been employed long-term. They also want to know your income is high enough that you can comfortably afford the payments on the loan.
- Loan purpose: This can affect the likelihood of repayment, too. Many people will do anything possible to avoid defaulting on a mortgage loan, but the default rate on a personal loan is higher because it’s unsecured — the borrower doesn’t have any collateral the lender can seize in the event of non-payment.
- Your existing debt: Lenders don’t want to give you a new loan if you’re already drowning in debt and your existing monthly payments exceed a certain percentage of your income.
Although each financial institution will have its own underwriting process, you can expect that most lenders will need to know at least this information when deciding whether to extend you credit.
What Does the Loan Underwriting Process Look Like?
Creditors do a lot of technical analysis during the loan underwriting process; however, the process is pretty simple for borrowers. You simply need to collect and provide the requested documentation to the lender and then wait to receive the lender’s decision.
The specific documents you’re asked to produce and the time the underwriting process will take is going to vary depending on the type of loan you’re seeking. The more you want to borrow and the longer the loan term, the more comprehensive the underwriting process will be. That’s why you’re generally asked to produce many more documents when you want a mortgage loan compared to when you apply for an auto or personal loan.
When you have gone through the underwriting process, you’ll receive one of three outcomes: approved (sometimes with conditions), denied, or suspended.
Approved is the ideal outcome. It means the lender has gone through all of your paperwork, assessed your risk, and determined you are a good loan candidate. When you’ve been approved, you can move forward with the loan process in order to formally secure your funding.
In some cases, your loan will be approved but with conditions. These conditions are additional requirements you must fulfill in order for you to receive official approval. Some common examples of conditions include:
- Proof you have secured title insurance on real estate you’re buying with a mortgage.
- Results of a title search on a property you’re buying (clear title shows there’s no lien on the home or other problems with ownership).
- Proof the collateral (the home or vehicle you’re buying with the loan) appraises at a certain minimum value so they’re not lending you more than what the collateral is worth.
Your lender will specify whether the condition is prior to documents or prior to funding. If it’s prior to documents, you must satisfy the requested conditions before the lender will move forward with preparing final loan documents. If it’s prior to funding, you have to meet the conditions before you actually receive the funds, but these conditions don’t have to be fulfilled before the loan documents are created.
Denied means you have been rejected during the underwriting process and the lender will not provide you with loan funding. When your loan application is denied because of bad credit, your lender must provide a Notice of Adverse Action explaining the reason(s) why you were denied, such as a high debt-to-income ratio or history of missed payments.
After a loan denial, you’re typically allowed to review your credit report for free. You should do this in order to make sure there are no mistakes on your report that resulted in the loan denial. If you spot errors on your report, you can take steps to correct them.
If you were denied because of legitimate past credit missteps, insufficient income, or other issues, you can apply with a different lender, try to improve your credit or increase your income, or see if you can apply with a cosigner who can help mitigate your potential risk as a borrower.
If the underwriting process is suspended, this means the lender is pausing the process until it receives more information. Typically, this means you need to provide additional documentation. For example, the lender may require proof of income in the form of tax returns or recent paystubs.
Although a suspended decision is frustrating because it means the underwriting process takes longer and you have to wait to get your money, the good news is you can often move the process forward once again by providing the requested info promptly. There’s still a good chance you’ll be approved for the loan, as long as you can provide the verification the lender has requested.
What Information Do I Need to Gather During the Loan Underwriting Process?
The specific documents you’ll need will vary depending on the loan type and the lender’s underwriting process. Some of the documents you may need include:
- Tax returns
- Your credit report (lenders usually obtain this directly from the credit bureau once you’ve provided permission; in some cases, you’ll need to pay a fee for the lender to pull your report)
- A letter explaining any gaps in employment
- A letter explaining any problems with your credit history
- Several months of bank statements and investment account statements, including explanations for any large deposits or other unusual bank account activity
It can take time to gather these documents for your loan file, so start getting your paperwork together ASAP if you know you’ll be applying for a loan.
How Long Does Underwriting Take?
The specific length of time it takes to have your loan underwritten varies depending on the lender and your own financial situation.
If you’re self-employed, have started a new job recently, or earn income from non-traditional sources, the underwriting process will typically take longer. Still, here are some general estimates for how long you can expect underwriting to last:
Many personal loans don’t require a human loan processor; the underwriting process is done automatically. When your loan goes through an automated underwriting process, you can receive a loan decision within minutes.
For larger loans or when more verification is needed, manual underwriting may be required. In these situations, it can take anywhere from a few hours to a week or longer.
Conventional Mortgage Loans
In most cases, mortgage underwriting for a conventional loan — which is not insured by the Federal Housing Administration (FHA) or other government programs — takes around five to eight business days. However, the mortgage lender could take weeks to issue a decision in more complicated situations.
FHA loans are home loans insured by the FHA. There are many requirements lenders need to fulfill for this type of mortgage loan program, so the underwriting process takes longer.
In general, FHA loans are in the underwriting process for anywhere from two weeks to six weeks depending on what issues arise.
For most federal student loans, your credit history and income aren’t considered when determining loan eligibility. However, private student loan lenders have a more traditional underwriting process that looks at income, credit history, and sometimes, the educational institution the student will attend.
Student loan underwriting can sometimes be done via an automatic process, but manual underwriting may be needed, especially when borrowing larger loan amounts. Manual underwriting can take between several days or several weeks depending on the complexity of your financial situation and whether you have a cosigner.
Lenders will always insist on some kind of loan underwriting to protect themselves from financial loss. Be sure you are prepared to provide requested documentation to make the underwriting process go faster and to maximize your chances of approval so you can get your loan funds faster.
Author: Christy Rakoczy
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