How an Underwriter Review Your Mortgage Application
The 4 C's that an Underwriter checks before approving your mortgage application
Who is the Underwriter?
The Underwriter is the person charged with protecting the Lender from risk. What risk? Well, you! The Underwriter reviews your credit, income, debt, and details of the property in line with the Lending Guidelines set by the Lender, and by whatever agency is supporting the loan (Fannie Mae and Freddie Mac, VA, or FHA, etc.), and their job is to make sure that you will be able to repay the loan based on the submitted terms and documentation. If you want a mortgage (and you do!), then you’re going to need to give them what they want and should know what to expect from them.
So, how do they do their job and what should we be prepared for? Let’s take a look!
Most of us think of the credit score first, but what else is there to think about with credit?
The first thing that the Underwriter is going to review is typically your credit score and credit profile. Regarding the credit score, the mortgage program you’re qualifying for will have a range of acceptable credit scores (with a better interest rate for a better score) and the Underwriter will.
The typical “bottom” is at a 620 for example in the case of a Conventional mortgage. However, certain programs will have a higher minimum to qualify at 680 or 720, while others will go to 580 or even 500. Still others don’t even have a minimum score, but they go off of a “credit profile” assessment.
What is a credit profile? Well, it is the overall strength and history of the Borrower’s credit, that goes into making up the score. The most common factors are the amount of credit available (credit cards typically), the amount used of the amount available (called “credit utilization ratio”), the length of time that an account has been open, and the payment history (more lates are worse).
Other less common factors include mortgage lates, bankruptcies or foreclosures, car repossessions, collections or charge offs, and judgements won in court from collectors. These factors all affect your score, but more importantly they go into your credit profile which the Underwriter will review to see what the overall trend is. Even with a decent score, things like a recent foreclosure can be disqualifiers, and if you have collections the Underwriter may require you to settle them as a condition of the loan approval.
Pro Tip: your credit report is only good for 60 days (in most cases), so if you’re shopping for a home, or in the process of refinancing and there are delays, it is important to remember that ANY changes to your credit profile WILL affect your credit score. That means that if you go out and finance a car, or a mattress, or get a new promotional credit card at Home Depot your credit card you might be jeopardizing your home loan qualification.
Capacity or Ability to Repay
It’s not just about making slightly more money each month than your mortgage payment…
The Ability to Repay is actually a judgment call: regardless of the method of Underwriting, the Lender is required to make a reasonable good faith determination of your ability to repay the loan according to its terms.
The most common method of making this assessment is with the Debt-to-Income ratio. That is simply your monthly debt payments (mortgage, car payment, minimum credit card payments, student loans etc.) compared to your gross monthly income (that’s before taxes).
Where this can get tricky is if you have variable income, like commissions or bonuses, or if you run your own business and have significant write offs from your gross income. That is where an understanding of the Underwriting guidelines is essential, and that’s where you’re going to work with your Mortgage Professional.
The ability to repay doesn’t need to be based on your personal income however: certain loans for investment properties allow the Borrower to use the rent from the property to qualify, and others can be based on assets which the Borrower can “deplete” to cover the mortgage payment. These programs may have other guideline differences and that’s what the Underwriter will need to reference to get you qualified.
How much of this house do you own and how much are you willing to buy?
The answer to these questions will determine the Loan-to-Value ratio. There are two ways to get to loan to value, depending on whether it is a Purchase or a Refinance. Purchase transactions require a down payment of some kind and those are based on the purchase price. For example, buying a $500k house and putting down $100k would be a 20% down payment. The remaining amount would be the loan amount, $400k and so the loan-to-value ratio would be 80%. Essentially, it is what is left after the down payment as a percentage of the property value that determines your loan to value ratio.
Finally, we have a bonus “C” for those who read to the end and that is…
The Underwriter will also consider some of your personal characteristics when evaluating their creditworthiness. For example, a borrower who has jumped between jobs several times over the last 3 years, or who has had a recent bankruptcy or foreclosure might just be automatically disqualified from a certain loan program. Likewise, certain loan programs might only be available to 1st time home buyers, or certain professional groups (like doctors and nurses) might be able to use their education as work experience.
The goal of the Underwriter is to poke holes in the loan file to make sure that you’re going to perform according to the terms of the loan. They might ask for some things that seem silly, but it is important that they’re thorough. Working closely with your Mortgage Professional to navigate the process and get prepared is essential to coming through with the right home loan for you.
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