The underwriter is the key decision-maker in the mortgage process. They review all the documentation submitted by the processor and determine the risk involved with approving your mortgage. To determine the risk, an underwriter looks at the three C’s which are Credit, Capacity, and Collateral.
1. Credit is one of the most important factors in determining your risk. Your credit report shows the underwriter how you’ve handled repayment of your debts in the past. It covers car loans, student loans, etc. It predicts your likelihood to repay the proposed mortgage payments you are applying to receive.
2. Capacity deals with the ability to repay your mortgage. This is where employment history, income, and debt come into play. The underwriter wants to see a steady work history that would generate sufficient income to pay your new monthly mortgage payments as well as your current obligations. They use a debt-to-income ratio to determine your capacity. The debt-to-income ratio takes all your monthly debt payments, like car loans, your new mortgage, and credit card bills, and divides that by your gross monthly income. To qualify for most mortgages, your debt-to-income ratio needs to be at or below 43%.
3. Collateral deals with the value of the property you want to buy. The underwriter wants to make sure that your loan amount doesn’t exceed the property’s total value. If the loan amount is higher than the property's value, the lender's risk of lending money might be to high, and your loan could be denied. The underwriter reviews the property’s value by looking at two things: an appraisal and title.
Appraisal is a comprehensive report that shows the value of your property based on factors such as total square footage, number of bedrooms, location, year the property was built, etc. These factors are compared to other homes in your area that are similar, or comparable.
Title: While an appraiser looks at the physical side of your home, a title company verifies the property’s legal history. A title search is performed to verify that there are no claims such as mortgages, liens, or unpaid taxes on the property you are looking to buy.
Once the underwriter reviews your loan application it is possible that they will return with conditions. Conditions are typically a request to see more documentation regarding one of the 3 C’s. The underwriter usually needs to see this information before giving a final approval on your loan. If conditions arise, your loan officer and processor will be right there to help answer questions and get the conditions taken care of.
What’s next? Now that your file has been reviewed and approved you are ready for the final step in the loan process, closing your loan.