Explaining the Loan Process - Mortgage Underwriting

Please note: Slight discrepancies in this process may occur as lenders may designate responsibilities differently among loan processors and underwriters.

Your mortgage application will pass from the hands of the loan processor to the desk of the underwriter. In the mortgage underwriting process, an underwriter will make sure your financial profile matches your lender's guidelines and loan criteria. Then, your underwriter will make the final decision – to approve or deny your loan request.

The Job of an Underwriter – Assessing Risk

An underwriter's main task is to asses a borrower's risk. Have you ever declared bankruptcy or gone into foreclosure? Or, do you always pay your bills on time or have a fantastic credit score? These questions will reveal how you manage debt. They will also predict your ability to make the proposed mortgage payments.

The 3 C's of Underwriting: Capacity, Credit, and Collateral

To more easily assess a borrower's risk, mortgage underwriters follow a set of guidelines – the 3 C's of underwriting.

Underwriters typically begin by looking at:

1) Capacity – Do you have the resources and means to pay off your debts?

The first question a mortgage underwriter asks is: can the borrower repay the mortgage? Underwriters determine the answer by analyzing and reviewing the borrower's employment, income, debt, and asset statements.

In particular, underwriters will take a close look at your debt-to-income ratio. They want to see that you have enough money to fulfill your current obligations as well as your new mortgage. Underwriters will also verify the state of your savings, checking, 401(k), and IRA accounts. They want make sure that if you lose your job or become ill, you will still be able to pay your mortgage.

2) Credit – Do you have a solid re-payment and credit history?

As we previously mentioned in Part 3, your credit is perhaps one of the most important factors in the loan approval process. Your credit report will reflect how you have handled and managed repaying past bills (car loans, student loans, and home equity lines of credit). It will also predict your ability to make the proposed mortgage payments on time and in full.

3) Collateral – What is the value and type of property being financed?

An underwriter wants to make sure a loan amount does not exceed a property's value. Otherwise, a lender may not be able to recover a loan's unpaid balance, in the case of a default. This is why an underwriter orders a home appraisal. This report will assess a home's current worth and safeguard a lender from lending too much money.

In addition, underwriters will also review the type of property you wish to purchase. Why is this? Well, not all homes have carried the same risks for lenders in the past. For example, many lenders consider an investment property a more risky investment than an owner-occupied home. Lenders assume that in a difficult financial situation, borrowers would more quickly walk away from an investment property than from their primary residence.

A Positive Thought

 Some home loans can be very easy to underwrite; many of us, however, have more complicated financial lives that make underwriting more challenging. Don't stress if your financial picture doesn't seem perfect to you. Your mortgage loan officer, processor, and underwriter are working as a team to find a home loan program for which you qualify. For example, a strong income, a large down payment, and significant savings could offset some of your possible credit issues. Similarly, good credit and a sizable income could overcome a lower down payment.

Interview with: Kamei Caver on Credit

• What do you do exactly and how can it help me?

I am an independent agent with Financial Education Services. Using your personal right under the Fair Credit Reporting Act to your advantage we help you dispute the mistaken negative ratings that may be preventing you from obtaining new credit when you need it most. FES is one of the most experienced credit education companies in business, we've helped clients restore their credit with credit files that included everything you can imagine, including inaccurate, obsolete or erroneous:

Late payments Charge offs Foreclosures Judgments

Repossessions Identity theft Closed accounts Bankruptcies

Negative settlements Liens Collections

• How long does it take for my credit score to improve?

Although everyone’s case is different, most of our clients see an improvement within the first 45 days

• What is a credit score?

A credit score is a number that reflects your risk level, as an individual, to a lender. The higher the number, the lower the risk will be to the lender. As you apply for increased credit or attempt to make a purchase, the lender will check your ability to pay back that loan. The more negative marks you have on your credit report, the less likely you will be granted the loan or purchase you requested.

• What does F.I.C.O means and how does it affect my credit?

A FICO score is a credit score developed by FICO (Fair Isaac Corporation), a company that specializes in what’s known as “predictive analytics,” which means they take information and analyze it to predict what’s likely to happen. The FICO score range is 300 – 850, with the higher number representing less risk to the lender or insurer. Consumers with high FICO scores (usually around 760 or higher, though every lender is different) are likely to get the best rates when they borrow, as well as the best discounts on insurance. There is a popular FICO score chart that describes the main factors that go into these scores:

    Payment History (35%)

•     Debt/Amounts Owed (30%)
•     Age of credit history (15%)
•     New credit/inquiries (10%)
•     Mix of accounts/types of credit (10%)

All of these factors are considered in other credit score models, so it’s safe to say that if you have a strong FICO score you likely have a good score with other models as well.

• Can I get a credit card with bad credit?

With bad credit, your options for credit cards are somewhat limited. Most companies won't provide a credit line without a deposit and virtually all credit cards are going to charge monthly fees. And even if you are approved, you will end up paying significantly higher interest rates. However, if used responsibly, these cards may be the best way to start establishing or rebuilding your credit.

• What steps should I take to rebuild my credit?

Well you would want to start by paying down your debt and paying your bills on time. However, at FES we have programs specifically designed for that such as Debt Zero and Positive Credit Builder. These are educational systems that are designed to guide you on how to more efficiently pay down you debt, as well as educate and provide you with resources to help you take the necessary  steps to enhance your credit score and manage your financial life. That information can be found on my website at www.clearmycredit.org

• What is a good credit score?

A good credit score is generally considered to be 720 or higher

• How long does something stay on your credit report before it goes away?

Negative credit accounts, or trade lines, can remain on your credit report for up to 7 years, and bankruptcies and other public records for up to 10 years. Inquiries on your credit report may remain for 2 years. These are the maximum times that are permitted by federal law for reporting agencies to show negative items; however, these times are not mandatory. At any time, a creditor or credit bureau may remove a derogatory remark from your credit report if the consumer requests an investigation into remarks that they feel are incorrect.

• Will checking my credit report hurt my credit score?

Contrary to popular belief, checking your own credit score doesn’t hurt your credit.

• How many points does an inquiry take off your credit report?

In general, credit inquiries have a small impact on one's FICO Scores. For most people, one additional credit inquiry will take less than five points off their FICO Scores.

• I’m deep in debt and have a terrible credit score. What should I do?
  

Visit my website at www.clearmycredit.org or call (856)389-4303 and we can discuss what steps you need to take to improve credit and change your financial situation.