Mortgage underwriting is the process used to determine if a borrower meets the minimum guidelines for a particular loan program. Underwriters evaluate a borrower's current financial obligations, past credit history and current income. An Underwriter evaluates a potential borrower's economic and credit situation to see if that situation meets the minimum guidelines set forth in the loan program's "underwriting guidelines."
Underwriters evaluate the "3 C’s" for each mortgage application: Credit, Capacity, and Collateral.
Credit: A Consumer's credit history is a record of how that Consumer has managed their current and past financial obligations. Underwriters evaluate if the Consumer has responsibly managed debts, loans and financial obligations in the past. Underwriters evaluate how a Consumer is currently managing the amount of credit extended to them. Underwriters look at past financial events such as bankruptcies, tax liens and judgements recorded against them. All of this information is used to determine "credit worthiness". These details are also compiled by automated scoring systems to create a credit score. A credit score is a numerical score that ranges between 300 - 850 that helps lenders determine the amount of risk involved in lending to a particular Consumer.
Capacity: Capacity is the term used to evaluate a Consumer's ability to repay their debts. Income and expenses are analyzed to determine a "debt-to-income ratio." This ratio divides the minimum monthly payments on all obligations reporting a a Consumer's credit report, housing expenses and other monthly obligations by their gross income. This debt-to-income ratio helps Underwriters determine whether the Consumer has enough income to meet all of these obligations while still having the neccessary funds for discretionary expenses such as food, clothing, insurance, etc.
Collateral: Collateral is a term used to determine whether the value of the asset securing the debt is sufficient compared to the amount of the loan. An appraisal of the home's value will be completed by a licensed appraiser who will look at all of the value aspects of a home to determine it's value. If the value of the house is suffiicient to repay the debt in the event of a default, then the loan-to-value is at an acceptable percentage and the collateral requirement will be met.
The underwriting process can be a difficult process for some Consumers. Common sense is not the standard used and that can be frustrating for some Consumers. Stay in contact with your Loan Originator during the process and be sure to provide any requested documents as quickly as possible.