Mortgage underwriting is how a lender decides whether you can repay the loan — and it is a federal legal duty, not a house policy. Regulation Z says a creditor “shall not make a loan that is a covered transaction unless the creditor makes a reasonable and good faith determination at or before consummation that the consumer will have a reasonable ability to repay the loan according to its terms.” The rule names eight specific things the lender must consider and requires the information relied on to be verified with third-party records. One thing it no longer contains: a 43% debt-to-income cap. The Consumer Financial Protection Bureau removed that in December 2020. (Looking for the insurance sense of the word? See insurance underwriting.)
What does a mortgage underwriter actually do?
An underwriter answers one question with documents: will this borrower repay this loan on these terms? Everything else — the pay stubs, the bank statements, the appraisal, the letter explaining a deposit — is evidence gathered to answer it. What separates mortgage underwriting from a generic credit decision is that the question is imposed by law and the inputs are enumerated.
The governing text is Regulation Z, 12 CFR §1026.43, the “ability-to-repay” rule that applies to almost every consumer mortgage secured by a dwelling. Its core sentence is short: a creditor “shall not make a loan that is a covered transaction unless the creditor makes a reasonable and good faith determination at or before consummation that the consumer will have a reasonable ability to repay the loan according to its terms.” Underwriting is how a lender proves it did that — which is why it needs records rather than your word, and why the requests keep coming until the file supports the conclusion.
The eight things a lender must consider
Regulation Z §1026.43(c)(2) does not leave the inputs to the lender’s discretion. It lists them. Any document you are asked for is almost certainly serving one of these eight lines:
| What the rule requires the lender to consider | What that looks like in your file |
|---|---|
| Your “current or reasonably expected income or assets, other than the value of the dwelling” | Pay stubs, W-2s, tax returns, bank statements. The home itself does not count as a repayment source. |
| Your current employment status, if the lender relies on employment income | A verification of employment. This one may be verified orally, provided the lender “prepares a record of the information obtained orally.” |
| Your monthly payment on the loan you are applying for | Calculated by the rule’s own method, not the teaser payment. For an adjustable rate it uses the fully indexed rate or the introductory rate, whichever is greater. |
| Your payment on any simultaneous loan the lender “knows or has reason to know will be made” | A piggyback second lien or a HELOC closing alongside the first. |
| Your monthly payment for mortgage-related obligations | Property taxes, required insurance, HOA fees, ground rent, special assessments — why your escrow figure affects qualification. |
| Your “current debt obligations, alimony, and child support” | Everything on the credit report, plus court-ordered support that may not appear there. |
| Your monthly debt-to-income ratio or residual income | Note the “or.” One or the other must be considered. The rule sets no maximum for either. |
| Your credit history | Your report and score — one input among eight, not the decision. |
Then the rule closes the loop on evidence: a creditor “must verify the information that the creditor relies on… using reasonably reliable third-party records.” For income it names what those records can be — an IRS tax-return transcript, copies of filed returns, “IRS Form W-2s or similar IRS forms,” “payroll statements, including military Leave and Earnings Statements,” financial institution records, employer records, and government records of benefit income. Stated income is not on the list, and the CFPB’s own compliance guide puts the consequence bluntly: “it is no longer possible to originate loans based on stated income.”
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Is there a 43% debt-to-income limit? Not any more.
No — and the seventh line of that table is where the most durable myth about mortgage underwriting comes from. The 43% figure was real, it was federal, and it was removed. The CFPB’s December 2020 final rule amending the General Qualified Mortgage definition says so in its own summary: the rule “removes the General QM loan definition’s 43 percent DTI limit and replaces it with price-based thresholds.”
You can confirm the outcome in the regulation rather than taking anyone’s word for it. The phrase “43 percent” appears zero times in the current text of 12 CFR §1026.43. So does “Appendix Q,” the appendix that used to prescribe how the ratio was calculated.
Two things people get wrong when they hear this:
- DTI did not stop mattering. It is still one of the eight mandatory considerations, and a Qualified Mortgage still requires the lender to consider your ratio or your residual income and verify the inputs. What disappeared was the numeric ceiling that turned that consideration into a pass/fail line.
- Lenders can still set their own limits. Nothing stops a lender, investor or loan program from applying a ratio cap as a business rule. If you are told 43% or 45% or 50%, that is an overlay, not the federal rule — and it is worth asking which.
Why almost every article still says 43%
Because the source that says it is still online, still hosted by the CFPB, and easy to find. The Bureau’s March 2016 ability-to-repay compliance guide — version 2.4 — is still served from files.consumerfinance.gov and refers throughout to “the 43% DTI requirement under the general QM provision.” It was accurate when published, and it has been superseded twice since. The version that replaced it, dated April 2021, contains the phrase “43 percent” exactly zero times and describes the price test instead. Check the date on a guide before you trust it, and check the regulation itself, which is published as dated current text.
What replaced the 43% limit: a price test
The General QM category now turns on the loan’s price, not the borrower’s ratio. Here is the operative sentence verbatim, because the direction of the test is easy to reverse by accident. A qualified mortgage is a covered transaction:
“For which the annual percentage rate does not exceed the average prime offer rate for a comparable transaction as of the date the interest rate is set by the amounts specified in paragraphs (e)(2)(vi)(A) through (F) of this section.”
Read slowly, that means: take the loan’s annual percentage rate, subtract the average prime offer rate for a comparable transaction, and the gap must come in below the threshold. Cheap relative to the market benchmark is inside the category; expensive falls outside it. The thresholds:
| Loan type | APR may exceed APOR by less than |
|---|---|
| First lien, at or above the top loan-amount tier | 2.25 percentage points |
| First lien, middle loan-amount tier | 3.5 percentage points |
| First lien, smallest loan-amount tier | 6.5 percentage points |
| First lien secured by a manufactured home, below the top tier | 6.5 percentage points |
| Subordinate lien, larger loan amounts | 3.5 percentage points |
| Subordinate lien, smaller loan amounts | 6.5 percentage points |
We have described the loan-amount tiers rather than printing dollar figures on purpose. The regulation attaches “(indexed for inflation)” to each one, says the amounts “shall be adjusted annually on January 1 by the annual percentage change in the Consumer Price Index for All Urban Consumers,” then points readers elsewhere: “See the official commentary to this paragraph (e)(2)(vi) for the current dollar amounts.” A dollar figure copied from an old guide is exactly the mistake this section exists to correct. The percentage-point spreads above are not indexed.
Why this reaches you at all: QM status decides how much legal protection the lender gets if its ability-to-repay determination is later challenged — an incentive that shapes which loans get made, and at what price.
FHA’s 31 and 43 are a completely different number
With an FHA loan you will run into the ratios “31/43”, and the coincidence is unfortunate: this 43 has nothing to do with the repealed one above. Different agency, different rule, different denominator, narrower scope. Read this section on its own terms.
HUD’s Single Family Housing Policy Handbook 4000.1 sets these as ceilings for manually underwritten mortgages only: “The maximum Total Mortgage Payment to Effective Income Ratio (PTI) and Total Fixed Payments to Effective Income Ratio, or DTI, applicable to manually underwritten Mortgages are summarized in the matrix below.” Both are measured against Effective Income, an FHA-defined term meaning “income that may be used to qualify a Borrower for a Mortgage,” which “must be reasonably likely to continue through at least the first three years of the Mortgage.” The first number is the housing payment alone; the second is all fixed payments.
| Lowest minimum decision credit score | Maximum qualifying ratios | Compensating factors HUD requires |
|---|---|---|
| 500–579, or no credit score | 31/43 | “Not applicable. Borrowers with Minimum Decision Credit Scores below 580, or with no credit score may not exceed 31/43 ratios.” |
| 580 and above | 31/43 | “No compensating factors required.” |
| 580 and above | 37/47 | One of: verified and documented cash reserves; minimal increase in housing payment; or residual income. |
| 580 and above | 40/40 | “No discretionary debt.” |
| 580 and above | 40/50 | Two of: verified reserves; minimal payment increase; significant additional income not reflected in Effective Income; or residual income. |
The handbook allows stretch ratios of 33/45 on qualifying Energy Efficient Homes, and sets a separate credit-score gate: a minimum decision credit score “at or above 580” is “eligible for maximum financing,” 96.5% of the adjusted value on a purchase, while “between 500 and 579” is “limited to a maximum LTV of 90%.” Those are loan-to-value limits, not ratio limits. So: FHA publishes a ratio table for manually underwritten loans, and a Regulation Z ratio ceiling no longer exists. Two facts, no bridge between them.
Automated underwriting versus a human underwriter
Most files are scored by software first. FHA’s version is the TOTAL Mortgage Scorecard, and the handbook is unusually clear about what the machine does not decide: “Mortgagees using TOTAL remain solely responsible for prudent underwriting practices and the Final Underwriting Decision.” The scorecard returns a recommendation on a Feedback Certificate, and where it lands determines who does the work.
- Accept/Eligible. The loan may be eligible for insurance endorsement, provided the lender verified that the data entered was accurate and complete and that the supporting documentation is consistent with the final underwriting decision.
- Accept/Ineligible. In HUD’s words, “the Borrower’s credit and capacity would meet the threshold for approval, but the Mortgage does not fully comply with FHA’s eligibility requirements.” The certificate names the requirement that was missed.
- Refer. “The underwriter must manually underwrite any mortgage application for which the Feedback Certificate shows a Refer recommendation or any result other than those described above.”
An Accept can also be thrown back to a human anyway. HUD calls it a downgrade, and several triggers are things a borrower can see coming. A lender must downgrade and manually underwrite an Accept if the file “contains information or documentation that cannot be entered into or evaluated by TOTAL Mortgage Scorecard”; if information the system did not consider “affects the overall insurability of the Mortgage”; if the borrower has “$1,000 or more collectively in Disputed Derogatory Credit Accounts”; if a bankruptcy discharge falls within two years of case number assignment; if a short sale, foreclosure or deed-in-lieu falls within three years of it; or if business income “shows a greater than 20 percent decline over the analysis period.” Once downgraded, the lender “must cease its use of the AUS and comply with all requirements for manual underwriting.”
That is the mechanism behind an experience borrowers describe as capricious: an approval that looked automatic, then a demand for six months of statements. Nothing went wrong. A trigger moved the file to a person, and the person works to a longer checklist.
The property is underwritten too
Underwriting is not only about you. The collateral has to support the loan, which is why an appraisal can hold up an otherwise clean file. You have two federal rights here and they are easy to miss. Under Regulation B, a creditor must mail or deliver a notice of your right to receive appraisal copies “not later than the third business day after the creditor receives an application for credit that is to be secured by a first lien on a dwelling.” And it must actually provide them: a creditor “shall provide an applicant a copy of all appraisals and other written valuations developed in connection with an application… promptly upon completion, or three business days prior to consummation of the transaction… whichever is earlier.” You do not have to ask, and you do not have to wait for closing.
“Clear to close” and “the three Cs” are industry jargon
Both phrases are used constantly and neither is defined by anyone official. We checked rather than assumed. “Clear to close” appears zero times in the 1,886-page FHA Single Family Housing Policy Handbook 4000.1, and zero times in the Regulation Z and Regulation B sections that actually govern the process. “The three Cs” — usually given as credit, capacity and collateral — appears zero times in the same handbook. That does not make them useless. It means treating them as shorthand rather than status:
- “Clear to close” is a lender’s internal signal that underwriting conditions have been satisfied and the file can be scheduled. It is not a regulatory milestone and not a promise, and it does not stop a lender from re-verifying employment or re-pulling credit before closing.
- “The three Cs” is a teaching mnemonic. The binding list is the eight-item one in §1026.43(c)(2) above, which separates income from employment status and counts simultaneous loans and escrowed obligations that a three-bucket summary hides.
Use the jargon if it helps you talk to your loan officer. Do not use it to work out where your file stands.
How long does mortgage underwriting take?
No federal source publishes an answer, and we are not going to invent one. It depends on the lender, the loan type, whether the file was downgraded to manual underwriting, and how fast documents come back — and any “average” you read is a vendor’s number, not a measured one. What is fixed in law are the clocks on the paperwork around underwriting, which is a different thing:
- Three business days from application to your Loan Estimate. Regulation Z requires the creditor to deliver or mail it “not later than the third business day after the creditor receives the consumer’s application.”
- Three business days before closing for your Closing Disclosure. The creditor must ensure you receive it “no later than three business days before consummation.”
- Thirty days for a decision notice. Under Regulation B a creditor must notify you of action taken within “30 days after receiving a completed application.” Read that precisely: it is a deadline on telling you, and it runs from a completed application — which is why an outstanding document request can keep the clock from starting. It is not a promise that underwriting finishes in 30 days.
If you are declined, the same rule gives you the reasons. An adverse action notice must be in writing and must contain either “a statement of specific reasons for the action taken” or a disclosure of your right to request one within 30 days, if you ask within 60 days of the notice. For anyone planning to reapply, that statement is the most useful document in the process — and most people never request it.
How to keep your file moving through underwriting
- Answer document requests in full, in one pass. Every request maps to one of the eight required considerations, and partial answers restart the loop rather than shortening it.
- Leave your credit and your debts alone until you close. Debt obligations and credit history are two of the eight inputs, and lenders commonly re-verify both before closing.
- Do not change jobs or pay structure mid-file. Employment status is a separate consideration, and income must be documented as reasonably likely to continue.
- Document deposits before you are asked. Anything irregular in a bank statement becomes a question; a dated gift letter attached up front answers it once.
- Read the appraisal when it arrives. A valuation error is easier to challenge before the file is conditioned around it.
- Ask whether a ratio limit you are quoted is federal or a lender overlay. Since the General QM cap was repealed, most numeric ceilings you will hear are program policy, and policy differs at the next lender.
- If you are declined, request the statement of specific reasons. Regulation B entitles you to it, and it tells you what to fix.
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Frequently Asked Questions
What is mortgage underwriting?
It is the lender's process of deciding whether you can repay the loan, and it is a federal legal duty rather than a house policy. Regulation Z says a creditor may not make a covered mortgage unless it makes a reasonable and good faith determination that the consumer will have a reasonable ability to repay the loan according to its terms. The rule names eight factors the lender must consider and requires the information relied on to be verified with third-party records.
Is there a 43% debt-to-income limit for a mortgage?
Not under federal law. The CFPB's December 2020 final rule removed the General Qualified Mortgage definition's 43 percent DTI limit and replaced it with price-based thresholds, and the phrase “43 percent” now appears zero times in the current text of 12 CFR 1026.43. Lenders and loan programs can still apply their own ratio limits, so if you are quoted a cap, ask whether it is federal or the lender's own.
Why do so many websites still say the 43% rule applies?
Because the CFPB still hosts the superseded March 2016 version of its ability-to-repay compliance guide, which refers to “the 43% DTI requirement under the general QM provision.” The current version of that guide, dated April 2021, does not contain the phrase “43 percent” at all and describes the price-based test instead.
Is FHA's 31/43 the same as the repealed 43% QM limit?
No, and the resemblance is a coincidence. FHA's 31/43 are maximum qualifying ratios that HUD's Handbook 4000.1 applies only to manually underwritten mortgages, measured against FHA's defined term Effective Income. The repealed 43% was a Regulation Z threshold on total monthly debt obligations against total monthly income. Different agency, different denominator, different scope.
What does clear to close mean officially?
Officially, nothing. The phrase appears zero times in HUD's 1,886-page Handbook 4000.1 and zero times in the Regulation Z and Regulation B sections that govern the process. It is industry shorthand for a lender's internal judgment that underwriting conditions are satisfied, and it does not prevent a lender from re-verifying your employment or credit before closing.
Sources
- 12 CFR §1026.43 — Regulation Z: Minimum standards for transactions secured by a dwelling (ability-to-repay and qualified mortgages), current text
- CFPB — Qualified Mortgage Definition under the Truth in Lending Act (Regulation Z): General QM Loan Definition, final rule (December 2020)
- CFPB — Ability-to-Repay and Qualified Mortgage Rule: Small Entity Compliance Guide, version 3.1 (April 2021) — the current guide
- CFPB — Ability-to-Repay and Qualified Mortgage Rule: Small Entity Compliance Guide, version 2.4 (March 2016) — SUPERSEDED; still states the repealed 43% DTI requirement
- HUD — FHA Single Family Housing Policy Handbook 4000.1, transmittal issued November 26, 2025 (1,886 pp.)
- 12 CFR §1002.9 — Regulation B (Equal Credit Opportunity Act): Notifications
- 12 CFR §1002.14 — Regulation B: Rules on providing appraisals and other valuations
- 12 CFR §1026.19 — Regulation Z: Certain mortgage and variable-rate transactions (Loan Estimate and Closing Disclosure timing)
