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. The mortgage underwriting 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 Mortgage Underwriting Process

The three 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.

1. 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.

2. Capacity

Assessing a borrower’s capacity answers the question “Can the borrower pay off their debt?”

Lenders evaluate capacity by considering 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. Lenders calculate this based on several elements, comparing a borrower’s gross monthly income to 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.

3. Collateral

The property being purchased by the borrower serves as their collateral. The underwriter evaluates the value of the financed home to ensure that the loan amount does not surpass the property’s value. To do so, they will request an appraisal of the home.

Ensuring an accurate loan amount safeguards the lender against the risk of being unable to recover the outstanding balance if a borrower defaults on payments.

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.

Protect Your Credit With These Seven Effective Tips

In the current economic climate, credit is more important than ever in lender decision-making. Advancements in technology have made credit more susceptible than ever to theft.

Read about them here.

Lower your Debt-to-Income Ratio

It is advisable to settle any debt early before applying for a home loan. Increasing your monthly payment against debt will lower your overall debt faster, therefore lowering your debt-to-income ratio (DTI).

To keep your DTI low, avoid acquiring any new debt and large purchases until you have a larger savings account. If you are able to put down a larger down payment for a purchase, you will need to fund less on credit, protecting your DTI.

Ensure Employment Stability

When preparing to apply for a home loan, it is important to consider your current employment. If you are planning on changing employers, discuss this with your loan originator. Providing a stable image of your financial standing can increase your probability of acceptance.

Self-employed borrowers will need to provide additional information to determine their usable income. Due to this reason, if you have had a minimum of 2 years of self-employment, reach out to one of our loan originators to discuss the required information for your loan.

The Mortgage Experts at CDM Walk You Through the Underwriting Process

Chris Doering Mortgage can help you apply for home loan applications. Our team will be there for you every step of the way! Contact our team in Gainesville, FL to get started!

If you are ready to apply for your home loan now, start by filling out our pre-qualified loan application.