U.S. banks conduct a multi-step investigation when reviewing mortgage loan applications. First, they collect detailed financial documentation, including pay stubs, tax returns, W-2 forms, and bank statements, to assess the borrower’s income stability and debt-to-income ratio. Second, they perform a credit check through major credit bureaus (Experian, Equifax, TransUnion) to evaluate credit scores, payment history, and outstanding debts. Third, underwriters analyze the property’s value using appraisals and market data, often requiring a professional appraisal. Fourth, automated systems (e.g., Fannie Mae’s Desktop Underwriting) screen applications for compliance with lender guidelines and regulatory standards. Finally, banks verify employment and assets through additional documentation or third-party confirmations.

This rigorous process ensures banks mitigate default risks and comply with regulations like the Equal Credit Opportunity Act (ECOA) and the Consumer Financial Protection Bureau (CFPB) guidelines. Data from the Federal Reserve shows that 85% of mortgage applications were denied or conditionally approved in 2022 due to insufficient documentation or poor credit profiles. The FDIC reports that banks rejected 3.6% of mortgage applications in 2021 solely for credit score deficiencies. Additionally, the CFPB found that 60% of rejected applications involved unverified income claims or debt over limits. Tightening underwriting standards post-2008 financial crisis—evidenced by a 40% decline in subprime loans from 2006 to 2020 (U.S. Department of Housing and Urban Development)—reflects banks prioritizing risk management. Automated systems reduce manual errors, with Fannie Mae data indicating a 25% drop in post-closing disputes after implementing Desktop Underwriting. Thus, the combination of manual reviews, credit checks, and technology ensures alignment with both investor requirements and regulatory mandates while safeguarding financial stability.