Please note: Slight discrepancies in this process may occur as lenders may designate responsibilities differently among loan processors and underwriters.
In Part Four, 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 assess 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 to 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 to repay 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.
The Automated Underwriter
Most loans today are sold to Fannie Mae, Freddie Mac, the VA, or the FHA. Lenders must abide by the underwriting rules set by those organizations if they wish to sell the loans to them. To assist the lenders, some of the agencies have developed automated underwriting software.
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.