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Underwriting | Process & How It Works

Underwriting | Process & How It Works

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    Underwriting is a crucial step in the mortgage approval process where a mortgage underwriter evaluates your financial situation and determines if you qualify for a loan. The underwriter assesses factors like creditworthiness, income stability, down payment, and the property’s appraisal value; typically, this is the final step in the mortgage process before loan approval. In this article, we’ll walk you through the underwriting process, what concerns may arise during the review, and how you can address them prior to applying for a mortgage.

    Key Highlights

    • Mortgage underwriting is the process of assessing risk for the lender with regard to the borrower and the property.
    • The mortgage underwriter will analyze various aspects of your financial profile, including your credit history, income stability, down payment, and the property’s appraisal value.
    • Mortgage underwriting uses 3 principles to assess the risk prior to granting approval on the loan: capacity, credit and collateral.

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    What Is Mortgage Underwriting?

    Underwriting is a pivotal stage in the mortgage approval process. It involves an assessment of your financial situation, creditworthiness, and the property you wish to purchase. A mortgage underwriter is responsible for evaluating your application and determining if you meet the lender’s criteria for loan approval. They play a crucial role in ensuring the lender’s risk is minimized, and the borrower’s ability to repay the loan is satisfactory.

    During the underwriting process, the mortgage underwriter analyzes various aspects of your financial profile, including your credit history, income stability, down payment, and the property’s appraisal value. While your lender takes care of this process, you may be asked to provide additional documentation or answer specific questions about your profile, in order to make sure that you can afford to buy your home and pay it off. 

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    What Does a Mortgage Underwriter Do?

    Mortgage underwriters will assess you and your subject property’s risk to the lender. They assess this in multiple ways – by looking at your income, investment/down payment and identity documents. They will also pull your credit report to see your character in paying your past debts, as well as the integrity of your credit score – based on a variety of factors. These factors can include the length of time you have had your credit facilities and the amount you have utilized over time – to assess your capacity to repay them fully over time. These assessments are better known as underwriting due diligence. When the mortgage underwriter is completing their due diligence on your financial situation they are looking for any red flags that might show up on your credit bureau, income and down payments.

    Common Red Flags An Underwriter Looks For

    During the underwriting process, mortgage underwriters look for specific red flags that may indicate a higher risk of default or loan repayment issues. Being aware of these potential red flags can help you prepare and address any concerns before applying for a mortgage.

    Credit Bureau Red Flags

    One of the key areas underwriters review is your credit history. They examine your credit score, payment history, and outstanding debts. Several red flags can raise concerns for underwriters:

    Low Credit Score: A low credit score indicates a higher risk borrower and may lead to a loan denial or higher interest rates. Similarly, a lack of credit history can have a similar impact, even if your credit score is decent.

    Late Payments: Consistent late payments raise concerns about your ability to meet your financial obligations. Things like a nonaccrual loan (missed payments over 90 days or more) will have some serious impact on your credit bureau.

    Credit Card Utilization: A high credit utilization ratio, where your credit card balances are close to the credit limit, or overdraft payments can negatively impact your creditworthiness, as it may indicate to the lender that you are living above your means. On the other hand, a lack of utilization can also be an issue;  less than 2 revolving credit facilities means that your score is only based on one facility and could be seen as a risk to the lender.

    Income Red Flags

    Income stability is a crucial factor in underwriting. Underwriters assess your income to ensure you have the financial means to make mortgage payments. Some income-related red flags underwriters look for include:

    Unstable Income: Frequent job changes or gaps in employment may raise concerns about the stability of your income.

    Self-Employment: If you are self-employed, underwriters carefully review your income documentation, including tax returns and profit/loss statements. However, like the above, concerns may arise if your income is deemed unstable.

    Insufficient Income: If your income is not sufficient to cover your mortgage payments, it may result in loan denial. However, such a concern is usually raised before the underwriting process.

    Down Payment Red Flags

    The down payment plays a significant role in the underwriting process. Underwriters assess the amount and source of your down payment funds. Some potential down payment red flags include:

    Down payment history: It’s good practice for the underwriter and lender to review the 3-month history of your down payment to make sure that the savings/investments were built up over a reasonable amount of time or through large increases in your investment gains. This due diligence is done in part to comply with anti-money laundering legislation as well as to confirm that you indeed have the savings to complete your home purchase.

    Source of down payment: The lender has a legal obligation to make sure the funds come from legal and legitimate sources. If you were gifted a down payment you need to inform your broker of this beforehand. With any uncertainty, the lender may ask for longer proof such as 6 or 12 months of deposit history, alongside proof that the money came from a related individual as per the federal government requirements.

    Borrowed Down Payment: Using borrowed funds for the down payment can raise concerns for underwriters, as it indicates additional debt.

    What is Analyzed During the Underwriting Process

    During the underwriting process, the mortgage underwriter analyzes several key factors to determine your loan eligibility. These include:

    Income: The underwriter reviews your income documentation, such as proof of income and tax returns. They assess your income stability, consistency, and sufficiency to cover mortgage payments. The underwriter also considers any additional sources of income, such as rental income or investments.

    Credit: Your credit history is thoroughly examined by the underwriter. They review your credit score, payment history, outstanding debts, and any concerning marks on your credit report. A positive credit history demonstrates your ability to manage credit responsibly.

    Appraisal: The underwriter evaluates the property’s appraisal report to ensure it meets the lender’s guidelines. They assess the property’s value, condition, and marketability. A favorable appraisal report is crucial for loan approval.

    Assets: Underwriters review your asset documentation, including bank statements, investment accounts, and retirement savings. They assess the availability of funds for the down payment, closing costs, and reserves. Sufficient assets can strengthen your loan application.

    What Step is Underwriting in the Mortgage Process?

    Underwriting (of the terms and conditions) usually occurs once you’ve accepted an offer on a property – or in the case of renewals or refinances – once you have provided all the documents to validate your identity, income and credit. This is a step that usually occurs later in the homebuying process.

    Before the underwriting process, you will first have to prequalify for the amount of loan you are able to service based on your debt service ratios. At the preapproval or prequalification stage you will not be required to have a purchase but rather be assessed for the maximum loan you can qualify for based on the income and current liabilities that make up your current financial situation. Once your offer to purchase has been accepted by the seller then you can move forward with having your mortgage underwritten to purchase the specific subject property. The approval you receive is connected to that particular property so if you decide to walk away and move forward with another property then your approval may become null and void.

    What are the 3 Cs of Mortgage Underwriting?

    Mortgage underwriting hinges on the principle of the 3 C’s – capacity, credit and collateral. These principles overlay on each other to create a total risk analysis for the lender on your financial situation. 


    Capacity assesses your ability to repay your debts in a timely manner – including the mortgage and property obligations such as heating, condo fees and property taxes – as well as any outside debts such as car/student loans or minimum payments based on your revolving credit limits or utilization. The underwriter will look at all your regular payments and the stress-tested mortgage payment based on the mortgage balance you will need to carry. They will confirm your debt-to-income ratios to confirm your capacity.

    Capacity is measured as a ratio of your household debts such as the mortgage payment, heating costs, property taxes and condo fees if applicable. Household debts over your income are known as the gross debt service ratio (GDSR) which cannot exceed 32% to 39% based on the transaction type, your credit, and your collateral. When your outside debts are also considered in the ratio alongside your household debts – this is called the total debt service ratio (TDSD), which can range from 40% to 44% depending on your transaction type, credit and collateral.

    It is important that you do not jeopardize your income in any way after your approval is received –especially if your closing date is a longer term since the lender may ask to confirm your income and credit once more exactly 30 days prior to your closing date. Jeopardy can come in the form of changing jobs or being laid off – or simply not being able to get a document from your employer in a timely manner.


    Mortgage underwriters use a credit report to assess repayment history and risk of default, which is non-payment, to the loan. They will pull a full credit report and review each of the accounts and your repayment history to assess your credit score’s integrity based on length of time and utilization. They will also look at the variety of accounts and your ability to pay them if you should be granted mortgage approval with a balance remaining on them. A good credit history is one which will receive favourable terms and conditions on your mortgage. It is imperative not to apply for any new credit, close any existing credit, or utilize more of your credit after your approval – until your home is closed. A new facility on your credit bureau can take 50 points off your credit score. Any changes to your credit or capacity can jeopardize your mortgage approval even after it has been issued.


    Collateral is a separate assessment which is made with regard to the property. The mortgage underwriter wants to review your down payment versus the property value – the lower of the appraised value or the purchase price – this is calculated and known as the Loan-to-Value (Ratio). The LTV assesses the risk you are to the lender based on your down payment. As this measurement is based on the property’s value – the property as the collateral will have the biggest impact on this risk.

    It is important to note that even after the approval process – your mortgage can have a condition to confirm the valuation and quality of the property. This condition can put delays in the approval process – in some cases it can jeopardize the process altogether if the valuation comes back much lower that you cannot make up the difference with an extra down payment, or any defects in the property.

    There are a multitude of defects that come up in the appraisal process such as the presence of mold or asbestos in which case the lender may ask you to remedy this as a condition of approval prior to releasing any mortgage funds to your solicitor. Knob & tube wiring, Kitec plumbing, or a roof that is not in better than good condition are sure ways for the lender to recondition your approval to have these fixed before a firm approval is issued to you. Taking the time to complete a home inspection report with a professional is a very valuable exercise as it will bring to light the costs involved in updating the home; as well as mitigating the price of the home in line with the much-needed repairs.

    Making offers on properties that were used for any illegal purposes such as grow ops, or a lack of a healthy balance in the reserve fund for condos – once disclosed can cancel your approval altogether. In this case, it is important to do your due diligence in finding a reputable and competent realtor who takes the time to make sure that the property that they show you has not been used for illegal activity in the past. Finding a solicitor early on will give them time to review the reserve fund before you waive your conditions of financing (also known as a notice of fulfillment). In this case, the conditions of financing are not just your financing but also the financing of the property.

    Frequently Asked Questions

    How long does it take an underwriter to approve a mortgage in Canada?

    The mortgage underwriting process can take between 24 to 72 hours in Canada, but it will ultimately depend on the lender. However, if there are conditions attached to your approval such as a need to complete a home inspection or an appraisal, there can be delays. Further delays may arise if your approval is re-conditioned to give you time to fix any issues with the home before you can get final approval. A full approval on your mortgage typically takes about 25 days if conditions need to be satisfied or an appraisal is required.

    Can a mortgage fall through during underwriting?

    Mortgage approval can be canceled after the fact for various reasons – mostly hinging on capacity, credit or collateral.  The most likely reasons can be loss or change in your job. New facilities on your credit bureau once funded can take away up to 50 points from your credit score – as these will impact your capacity as well. Appraisals coming back short where you cannot make up the difference with a bigger down payment from your savings, or the disclosure of the property previously being used for illegal activity are the simplest way to lose out due to issues with your collateral. It is advised that you get professional advice with regard to the property through your realtor; as well as using a solicitor early in the stage if you’re purchasing a condo.

    Final Thoughts

    In conclusion, underwriting is a critical step in the mortgage approval process. Mortgage underwriters carefully evaluate your financial situation and the property being financed to determine your eligibility for a loan. By understanding the underwriting process and addressing any potential red flags, you can increase your chances of a successful loan approval. Remember, each lender may have specific underwriting guidelines, so it’s essential to work closely with your mortgage advisor and provide all necessary documentation to facilitate the underwriting process.

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