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.
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.
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.
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.