Underwriting

Underwriting summary: 

• Underwriting is what happens after you apply for a loan and before a lender approves or denies your loan. 

• During underwriting, a lender verifies your income, assets, and debt to decide if you can repay a loan.

• The underwriting process could take a couple of weeks or more for home equity loans and several weeks or more for mortgages. The timing depends on the loan program, the lender, and your circumstances. 

Underwriting definition and meaning

Underwriting is a behind-the-scenes process that lenders use to decide whether to approve and fund a loan. The type of loan usually determines the exact steps that happen, but the end goal is the same: to assess the risk to the lender. 

You'll need to go through underwriting if you apply for a mortgage, home equity loan, or home equity line of credit (HELOC). An underwriter will look at your finances and the home you’re borrowing against to decide whether to approve you and how much you can borrow. 

Key concept: Underwriting is a process lenders use to identify risk.

More on underwriting

Need cash for home improvements, medical bills, or another large expense? A home equity loan or HELOC could save the day. But there's a hurdle you have to cross first: underwriting. 

Underwriting is a necessary, and sometimes time-consuming, step in the home equity loan process. It's easier to get through it if you know what to expect. 

Underwriting: a comprehensive breakdown

Loans, whether large or small, carry risk for the lender. Namely, there's the risk that you won't pay back what you borrowed, and they could lose money. Underwriting is a way for lenders to measure that risk to decide if they want to give you a loan. 

So what happens in underwriting? The lender assigns an underwriter to your loan application. This is an expert who's qualified to review your finances and the details of the loan to make sure it's a good fit. 

Here's what underwriting considers.

• Income. If you're getting a HELOC or home equity loan you're likely borrowing a decent chunk of money. So the underwriter will need to verify your income to make sure you can handle the payments. They might ask you for W-2s, tax returns, pay stubs, or other documents to show what you make.

• Debt. Along with what you bring in each month, the underwriter will look at what goes out to pay debt. Specifically, they'll check your debt-to-income (DTI) ratio. This is a measure of how much of your income goes to debt payments each month. 

• Equity. Home equity is the difference between what you owe on your home and what it's worth. You'll need sufficient equity to get approved for a home equity loan or HELOC. The lender checks your equity by getting an appraisal, which is a professional evaluation of your home's value. Some lenders require an in-person appraisal. Others allow for a desk appraisal, or an appraisal that’s done remotely with the help of home valuation software. 

• Credit check. A lender may check your credit initially and then follow up with a more in-depth review of your credit history during underwriting. The underwriter will look at your credit reports and scores to get a feel for how well you manage loans, credit cards, and other types of credit accounts. 

How long does HELOC underwriting take? It varies by lender but could take anywhere from about 10 days to several weeks. You can help keep the ball rolling by getting organized beforehand. 

How to navigate underwriting for a home equity loan or HELOC

If you plan to tap into your equity, a little preparation can go a long way. The simplest way to save time is to organize all your documents in advance, including:

• Pay stubs

• W-2s

• Tax returns

• Profit and loss statement and/or cash flow statement if you're self-employed

• Bank account statements

• Investment account statements

You might be required to pay the appraisal fee upfront. Your lender should tell you what kind of appraisal they require and when it will happen. A home appraisal could cost a few hundred dollars. The size of the home and where it's located can influence the final cost. 

At Achieve, appraisals are done remotely and at no cost to the borrower.

Lowering your DTI ratio could help you qualify. If you can, pay down some of your credit card balances or other debts before you apply. That could also help improve your credit utilization, which is your credit card balances compared to your credit limits. 

Finally, check your credit reports and dispute credit report errors if you find any. Some mistakes could knock big points off your credit scores. Any errors you can correct through a dispute could add valuable points back, which could smooth the path to HELOC approval.