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The Basics of Mortgage Underwriting

Underwriting a mortgage loan is as much an art as it is a science. Whether you’re in the market for a mortgage on a new home or refinancing, it helps to know what mortgage underwriters look for so you can meet the lender’s parameters for loan approval. Here are some things to keep in mind.

Mortgage underwriting is the analysis process an underwriter performs when trying to determine whether to approve or decline a mortgage loan. Mortgage lenders create mortgage programs with guidelines for acceptable risk factors to underwriters. When your loan reaches underwriting, an underwriter is ensuring your loan meets the mortgage lender’s parameters. Every financial situation is different which makes every loan unique.

An underwriter examines the borrowers’ ability to repay the mortgage based on the type of income the borrower earns. Underwriters verify if the borrower is employed, self-employed and if they are receiving other forms of income each month like Social Security or child support. In many cases it’s a combination of the two. One borrower may be employed full time and be self-employed part time with a second job. Another borrower may work part time and receive child support, alimony or Social Security checks. This is why it’s important to have your financial paperwork in order — paystubs, tax returns, W-2s, etc. — when you need a mortgage as it will make determining the total gross monthly income much easier for the lender.

No matter who you are, every mortgage loan requires a tri-merge report, the merging of credit information from all three major credit bureaus as Transunion, Equifax and Experian create a credit score based on their own formulas. The underwriter examines this report to see the borrower’s past payment history as a means of predicting the borrower’s willingness to repay the new loan. A borrower whose credit report shoes late mortgage payments or missed payments greatly increases the chance that the borrower will miss making a payment on their new loan.

Appraisal reports are also an important factor when it comes to underwriting. Some loan programs require a certain amount of home equity for loan approval. If a borrower defaults on the mortgage loan, the lender’s only true security is its ability to foreclose and sell the home to recoup the balance on the mortgage. An appraisal report tells a lender whether or not the home’s value supports the mortgage loan’s amount. Another factor that comes into play is the type of home. The value of condominiums rises and falls more dramatically than single family homes, making them more of a risk for lenders. But even riskier are manufactured homes with many lenders refusing to lend money on them.

While mortgage lenders have loan programs with what might seem like strict parameters, certain guidelines can be exceeded if the borrower can provide proof of stability in another area when he or she falls short elsewhere. A favorite calculation used by lenders is the debt-to-income ratio which measures your minimum monthly required debt obligations plus the new loan against your monthly gross income. Lenders like this ratio to be 38% – 42% or less. If your debt-to-income ratio was over 45%, but you had a high credit score and could show several months of payments saved in a bank account, the lender may wave the guideline.