Mortgage underwriting is the process of determining the amount of risk involved in making a loan. This is done by a specialist known as mortgage underwriter who takes into account the borrower’s credit history, income and debt liabilities, and the property value. Most of these risks fall under what is known as the three C’s of underwriting – credit, capacity and collateral.
Automated underwriting is now possible as sophisticated software and computer-based systems are being made available to evaluate a borrower’s creditworthiness and assess the risk associated with a mortgage loan. Automated underwriting removes the possibility of personal bias against the borrower. Risk scoring is an automated way to analyze a credit report using different predictive variables. A mortgage score presents a comprehensive analysis of the borrower’s ability to repay a mortgage loan.
Credit
No credit risk is what an underwriter aims at. The borrower must ensure that there is no possibility of mortgage default by presenting a clean credit history. Your credit report tells clearly whether or not you have paid your bills and debts on time in the past.
Check your credit report to ensure there is no error in it.
The data on your credit report is used to generate a number known as credit score, which is an important indicator of your creditworthiness. A credit score over 650 is usually considered ideal for a mortgage loan.
Is your credit score enough to get approval for a home loan?
If your credit score is less than perfect or you find issues in your credit report, you must act accordingly to improve your chances of mortgage approval.
Here is how you can improve your credit standing.
Check this out if you find yourself in the bad credit zone.
Capacity
An underwriter must look into the details of your employment, income, debt and asset statements to ensure you are capable of repaying the loan. Your capacity to repay the loan is dependent on your income, expenses, debt and savings.
Learn more about your capacity to repay a mortgage.
The ratio of your income and expenses is an important consideration for a mortgage underwriter. The ratio is termed as debt-to-income ratio or simply DTI.
Learn how to calculate your DTI.
Collateral
The amount you can borrow for a new home is largely dependent on the loan-to-value ratio (LTV). To calculate LTV, the lender uses the appraised value of a property, which might be different from the property’s sales price.
Learn how the appraised value of a property can affect mortgage underwriting.