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.
