Mortgage Tips

The Underwriting Process – What Will They Evaluate?

When a home buyer applies for a home loan, the application is accepted or rejected based on criteria that prove that the applicant is a financially stable and reliable candidate to make their payments on time. Requirements and qualifications vary based on each home loan program.

An underwriter is a hired vendor responsible for reviewing each application to assess the risk of lending to a borrower. This process not only protects the lender from potential default but also protects the borrower from entering a loan that they cannot afford.

During their assessment, they take three factors into consideration. Each factor is weighted differently based on the type of the home loan.

The Underwriting Process – The 3 C’s

To fully assess the risk of a borrower, underwriters review a borrower’s credit, capacity, and collateral. Based on their assessment, they determine if the borrower’s application matches the guidelines and qualifications of the home loan requested.

Credit

An underwriter will assess a borrower’s credit score and history to predict the borrower’s ability to make their payments on time and in full. How well an applicant has paid their debt in the past is a great indication of how well they will continue to do so in the future.

Credit history is perhaps the most important factor in a borrower’s application for a home loan. Credit scores are evaluated based on payment history, amounts owed, the length of your credit history, and types of credit. Normally, payment history and amounts owed are weighted the most heavily by an underwriter.
If you have concerns about your credit, contact one of our loan originators today to determine the best plan for obtaining a mortgage.

Capacity

Assessing a borrower’s capacity answers the question “Can the borrower pay off their debt?” Capacity is evaluated based on income, employment, and current debt. These evaluations determine whether or not a borrower can afford their current obligations and a new mortgage payment.

Debt-to-income ratio is an important factor in assessing a borrower’s capacity to repay their debt. This is calculated based on several elements of a borrower’s gross monthly income versus their outgoing expenses. Low debt-to-income ratios prove that an applicant can afford their current debt and have flexibility to acquire a mortgage loan.

Lastly, underwriters may also assess the applicant’s current savings and checking accounts as well as their 401(k) to determine the ability to continue paying off their loan in case they were to lose their job or become ill.

Collateral

The home that a borrower is purchasing is considered their collateral. An underwriter considers the value of the home being financed in order to ensure that the loan amount does not exceed the value of the property. To do so, they will request an appraisal of the home.

An accurate loan amount protects the lender from being unable to pay the unpaid balance of a loan in the case that a borrower does not make their payments and the home is repossessed.

Prepare for a Home Loan Application

Protect Your Credit

As you are preparing to apply for a home loan application, consistently monitor your credit score. This will allow you to identify areas of your credit history that need work and errors on your credit report that require disputing.

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Home Loan Pre-Approval – How it Works

Throughout the home buying process, you will encounter a series of steps to take that ensures an easy, efficient and prompt closing. Understanding what you are able to afford is a great first step in shopping for anything. So, why wouldn’t you do so for what could be the largest purchase of your life?

When you get pre-approved for a mortgage home loan, it means that a lender has evaluated your credit, employment history, and residential history to determine which home loans you are eligible for, the conditional size of the home loan that you could borrow and the conditional interest rates that you would be offered.

At Chris Doering Mortgage, we make it our priority to make the process of purchasing a home as easy as possible. That’s why we outline everything you need to know about getting pre-approved for your next home loan. This starts with understanding the difference between being pre-approved and pre-qualified for a mortgage.

Pre-Approved vs. Pre-Qualified

Although they sound similar, there are distinct differences between being pre-qualified for a home loan and being pre-approved.

The largest difference comes down to credit. Unlike a pre-qualification application, home loan pre-approvals require a preliminary credit check. Because of this extra step in the application review, the pre-approval process is more thorough in gauging a borrower’s financial standing. Therefore, it provides a better estimate of what a home loan would look like for the borrower.

A mortgage pre-qualification is a more informal process and does not carry as much weight in the eyes of sellers than a pre-approval. To get pre-qualified, your lender will ask you for information on your assets, income, and liabilities, and give you a ballpark estimate on what kind of loan you may be eligible to secure. Getting pre-qualified for a home mortgage loan is not required for pre-approval but many home shoppers get pre-qualified as a precursor to getting pre-approved. This can be completed over the phone or online using a pre-qualified home loan application.

Both sellers and real estate agents prefer pre-approval. A letter of pre-approval positions you as a legitimate candidate who is ready to buy.

How to Get Pre-Approved for a Mortgage – Documentation You Need

The home loan pre-approval application requires multiple forms of documentation regarding your personal information as well as your financial standing. Understanding what that documentation will consist of and gathering it beforehand will help you stay organized and ensure the pre-approval process is efficient. When applying, be prepared to supply the following:

Personal Assets

Your personal assets are shown through your bank statements from the past few months and any real estate holdings information including: property address, current market value, mortgage lender’s name and address, loan account number, balance and monthly payment.

Personal Debt

Personal debt is evaluated by looking at a credit report and any other new debt that is not yet listed on your credit report such as auto loans, student loans, mortgage loans, credit cards, etc. Your debt-to-income ratio will also be reviewed as a part of your application.

Employment Verification

You will be asked to provide the last 30 days of paycheck stubs as well as the past two years of W-2 or I-9 paperwork. If you are self-employed, you will be required to provide additional information on their business and income.

Residential History

The past two years of residential addresses and mortgage monthly payments will be required in the home loan pre-approval application. If you have rented for the past two years, then the address and landlord’s information will be requested for review.

What’s Next?

Once you have filled out the application and provided all necessary documentation, the application will be reviewed by your lender and a conditional loan amount will be provided. With this amount, you will be able to shop for homes that align with what you will be able to afford.

A pre-approval letter in hand is a great tool to have when you are shopping for a home. Realtors and sellers look at a pre-approval letter as a strong form of evidence that you are prepared to buy a home.

It’s important to note that even if you have a pre-approval letter, this does not mean that the mortgage is locked. Your home mortgage will still be subject to the home’s appraisal, home inspection, and any changes that you might incur financially before closing.

At Chris Doering Mortgage, we help our clients through every step of the homebuying process. Contact our office in Gainesville, Florida to get started on your home loan pre-approval.

Interest Rates Vs. APR – What’s the Difference?

Buying a home is a large investment and it’s important to have a clear understanding of the cost of your mortgage loan. Home shoppers are often confused about the difference between APR (Annual Percentage Rate) and interest rates. When evaluating a mortgage loan, interest rates can tell a different story than APR. It’s important to note that neither is better or worse than the other. If you understand what each represents, then you can make an educated decision on your mortgage loan. (more…)

Mortgage Rate Locks: What Home Buyers Need to Know

What is Rate Lock?

Mortgage rates can change daily, even hourly. When a mortgage rate is locked, it protects the borrower from interest rates rising between the time that the rate is locked and closing. However, because of changing rates and closing timelines, timing is everything when it comes to locking in a rate for a home mortgage.

A rate lock guarantees a borrower that they will receive a specific interest rate, at a specific price during a specific time for a home mortgage loan. This protects them from rising interest rates. (more…)

Closing Costs Explained

Throughout the process of securing a home loan and buying a home, you will encounter a series of costs outside just your down payment. Costs that accrue during the mortgage process and outside of the principal and interest on your home loan are called closing costs. (more…)

How Your Credit Score Affects Your Mortgage Rate

Mortgage interest rates are inherently variable. They fluctuate based on economic factors, both global and domestic, housing supply and demand for a particular area, and the credit score of the borrower.

There’s not much an individual borrower can do to stabilize the national economy. You can be smart about when and where you look for a home and make informed choices about what you can afford. But the major determining factor of mortgage interest rates that you have the most control over is credit score. (more…)

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