Inside Underwriting: Criteria That Make or Break Loan Applications

Why underwriting matters now

Underwriting is where an application meets objective risk assessment—and the moment an approval can be won or lost. Lenders use underwriting to protect capital, comply with regulations, and price risk. In the last decade the mix of human review and automated decisioning has grown, but the fundamentals underwriters use to judge creditworthiness remain the same. Knowing what underwriters look for helps you prepare documentation, correct errors ahead of time, and present the strongest possible application.

(Author note: In my 15+ years working with clients and lenders, the most successful borrowers prepare documents and address the few issues underwriters care about most. That preparation often shortens underwriting time and reduces conditions.)

How underwriting typically works

Underwriting begins once you submit a complete application and supporting documents. Lenders run credit reports, verify income and assets, check employment, and, for secured loans like mortgages, order an appraisal.

Broadly, underwriting follows these steps:

• Preliminary automated checks (credit, fraud flags, and initial DTI/LTV calculations). Many mortgage lenders use an Automated Underwriting System (AUS) for a first-pass decision. See our glossary entry on Automated Underwriting Systems for more detail: https://finhelp.io/glossary/automated-underwriting-system-aus/.
• Manual review by an underwriter who verifies documentation and resolves discrepancies.
• Conditions: underwriters issue a list of items you must clear (e.g., updated bank statements, explanations for gaps in employment).
• Final decision: approval, denial, or request for more documentation.

For a primer on the stages and what documents lenders expect, our guide to the loan underwriting process is a helpful companion: https://finhelp.io/glossary/loan-underwriting-process/.

The core underwriting criteria (what makes or breaks an application)

Here are the criteria underwriters most commonly weigh and how lenders typically evaluate them:

1. Credit score and credit file

• Why it matters: A credit score summarizes payment history, balances, credit age, and new credit — core predictors of future repayment behavior. Lenders use score bands to decide eligibility and pricing.
• Typical thresholds (as of 2025): conventional mortgages commonly start at a 620 FICO for basic eligibility; FHA loans can accept scores as low as 580 for 3.5% down or 500 with 10% down (subject to lender overlays). These are guidelines: different lenders set their own floors and overlays. (Source: Consumer Financial Protection Bureau, HUD/FHA guidance.)
• Practical steps: dispute inaccuracies on your credit reports, avoid new hard inquiries during underwriting, and reduce large revolving balances.

1. Income verification and documentation

• Why it matters: Underwriters need evidence that your income is stable and likely to continue. They’ll accept pay stubs, W‑2s, tax returns, 1099s, and profit-and-loss statements for self-employed borrowers.
• What triggers more scrutiny: variable income (commissions, bonuses), recent job changes, or self‑employment. In my practice, self-employed clients who provide year-to-date profit-and-loss statements plus two years of tax returns clear income verification faster.
• IRS is the authoritative source for tax return verification; lenders may request signed copies or transcripts from the IRS (see irs.gov).

1. Debt‑to‑income ratio (DTI)

• Why it matters: DTI measures how much of your monthly gross income goes to debt payments. Lenders use it to estimate how much extra monthly debt you can carry.
• Common guidelines: many lenders prefer DTI below 43% for mortgage eligibility, but programs and lender overlays vary. Lower DTI improves approval odds and pricing.
• How to improve DTI: pay down revolving balances, avoid new debts, or increase documented income.

1. Employment history and job stability

• Why it matters: Stable employment suggests ongoing ability to repay. Underwriters like a steady work history in the same industry for two years.
• How gaps are handled: reasonable gaps with documentation (unemployment benefits, medical leave, or a written explanation) can be acceptable. A documented new job in the same field with similar or higher pay is usually fine.

1. Assets, reserves, and down payment source

• Why it matters: Lenders want to know where down payments and reserves come from and that funds are seasoned (in your account for a specified time). Liquid assets also demonstrate ability to cover closing costs and several months of payments.
• Typical asks: bank statements, retirement account statements, gift‑letter documentation when funds are gifted.

1. Loan‑to‑value ratio (LTV) and property appraisal (for secured loans)

• Why it matters: LTV measures loan amount vs. property value. Higher LTV means higher risk and usually higher rates or insurance requirements.
• Appraisals: if the appraisal comes in low, you may need a larger down payment, a price reduction, a second opinion, or to choose a different loan program.

1. Collateral and purpose of the loan

• How it matters: For business loans, commercial lending, or auto loans, the quality of collateral and the loan purpose factor heavily into underwriter decisions.

1. Fraud checks and regulatory compliance

• Why it matters: Lenders must verify identities and screen for fraud and anti‑money‑laundering (AML) issues. Red flags slow or derail underwriting.

Automated vs. manual underwriting

Automated systems speed decisions and flag straightforward approvals, but manual underwriting is still used for complex files: self‑employed borrowers, large gifts, atypical income, or prior credit events. Both approaches rely on the same supporting documents; manual underwriting requires stronger explanations and lender judgment.

For borrower-specific document strategies, read our piece on mortgage underwriting for self‑employed borrowers: https://finhelp.io/glossary/mortgage-underwriting-for-self-employed-borrowers-documents-lenders-want/.

Real-world examples from practice

• Example 1: A borrower with a 720 credit score and a 47% DTI was initially flagged. By paying off a small auto loan and documenting a salaried job start date, we reduced DTI to 39% and cleared the file to approval. This shows how non‑credit issues (DTI) can be the real barrier.

• Example 2: A self‑employed applicant provided only one year of Schedule C tax returns. The lender required two years. After supplying a year‑to‑date profit‑and‑loss statement and amended returns, the underwriter accepted the file.

These cases reflect common patterns: credit is important, but underwriters often deny or place conditions because of documentation gaps, not just score alone.

Who is affected and how lender policies differ

All borrowers face underwriting, but criteria weight differs by loan type and lender:

• Conventional vs. government programs: FHA, VA, and USDA loans have program‑specific rules and sometimes lower credit score thresholds but require program qualifications.
• Banks and credit unions: local lenders may apply more flexible judgment for strong community borrowers.
• Online lenders: sometimes process faster through automation but may use stricter score/DTI cutoffs.

Always ask lenders about overlays—internal rules that are stricter than program minimums.

Practical checklist to improve approval odds (pre‑application)

• Pull and review your credit reports from the three bureaus; dispute errors.
• Collect two years of tax returns (if self‑employed, include profit & loss statements).
• Gather recent pay stubs, W‑2s/1099s, and bank statements for two to three months.
• Pay down high‑interest revolving debt to lower DTI.
• Avoid major purchases or new credit during underwriting.
• Keep documentation explaining income dips, employment gaps, or large deposits.

Common mistakes and misconceptions

• Waiting until after applying to fix credit errors — correct problems first.
• Assuming a single credit score tells the whole story — underwriters review the full credit file and behavior (late payments, collections).
• Hiding or failing to disclose debts or co‑borrowers — transparency speeds underwriting.
• Believing prequalification equals final approval — prequals are estimate-based; underwriting is definitive.

Frequently asked questions (brief)

• What minimum credit score do I need? It depends on the loan program and lender. Conventional loans often start near 620; FHA has lower thresholds in many cases (see HUD/FHA guidance).
• Can I be denied with a good credit score? Yes—DTI, documentation gaps, appraisal shortfalls, or unseasonal assets can cause denials.
• How long does underwriting take? Simple automated approvals can be hours; manual underwriting commonly takes several days to a few weeks depending on conditions and responsiveness.

Sources and further reading

• Consumer Financial Protection Bureau (CFPB): guidance on mortgage basics and underwriting factors — https://www.consumerfinance.gov.
• U.S. Department of Housing and Urban Development (HUD) / FHA program guidelines for credit and DTI thresholds — https://www.hud.gov.
• Internal Revenue Service (IRS) information on tax transcripts and verification — https://www.irs.gov.

Professional disclaimer

This article is educational and does not constitute individualized financial, tax, or legal advice. Underwriting rules and lender overlays change; consult your loan officer, mortgage broker, or a certified financial professional for advice tailored to your situation.