As a borrower, there are several important steps to be aware of when it comes to the mortgage process. First and foremost, you should understand that the process does not solely consist of finding the home of your dreams, submitting some paperwork to your lender, and moving in shortly after. The process does take time, as it generally consists of 6 stages: pre-approval, shopping for a home, loan processing, underwriting, and closing.
Of these steps, underwriting is one of the most critical stages to your home buying process. So what is mortgage underwriting? Basically, it is the stage when your loan request is approved or denied. To do this, mortgage underwriters will assess the borrower’s risk using the three C’s of underwriting:
- Credit: Here the underwriter will assess the borrower’s credit history. In other words, he or she will look at how the borrower has handled previous bills, including car loans, student loans, and even home equity lines of credit. This information will help the underwriter determine whether or not the borrower will be able to successfully complete each mortgage payment on time.
- Capacity: This basically answers the question of whether or not the borrower has the resources to pay their mortgage. The underwriter will particularly review the borrower’s employment, income, debt, assets, and overall debt-to-income ratio. In addition, the underwriter will confirm how much the borrower has in their checking, savings, 401k, and IRA accounts. This will allow the underwriter to determine if the borrower will be able to complete each mortgage payment in the case of an emergency, like they lost their job or became ill.
- Collateral: In this step, the underwriter will study the value of the property. More specifically, he or she will ensure that the loan amount does not exceed the value of the home. The purpose of weighing these values is to prevent the lender from loaning too much money, as well as to protect the lender if the borrower defaults. In addition to studying the home’s value, the mortgage underwriter will review the type of home the borrower is considering. This is because every type of property, like an owner-occupied home or an investment property, is considered a different level of risk to the lender.
Through the three C’s of underwriting, mortgage underwriters can ultimately determine the borrower’s risk. Of course, the decision to approve or deny a loan will be based on the underwriting rules set by the organization providing the loan, like Fannie Mae, Freddie Mac, the FHA, or the VA. For more information about mortgage underwriting, or to learn more about the mortgage process, contact one of our mortgage specialists today.