Mortgage underwriting is an important part of the mortgage process. A loan underwriter assesses the risk of offering a mortgage to a specific individual and determining the likelihood of the mortgage loan being repaid as agreed. To carry out such an assessment, a mortgage underwriter will take certain factors into consideration. These are Credit, Capacity and Collateral, known as the three Cs.
Mortgage Underwriting: Credit Score
Your credit score or FICO score is important to a mortgage underwriter. The underwriter will be interested in how much credit you currently have and how well you are managing it. Are you maintaining your payments as agreed? Have you too much credit for your current income to manage?
The history of your credit and repayments will be important. A lender will look for you having had a number of revolving credit accounts with good repayment records. If you are a buyer with no previous credit, then you may be regarded as a risk. No credit is almost as bad as bad credit!
Mortgage underwriting looks closely at any credit you have with respect to your housing. How well you have maintained previous mortgages for example. If you have rented, then the frequency of your rental payments will be a significant factor in their decision. If you have been delinquent on a mortgage or rental payment in last 24 months then you may have a problem.
Capacity to Pay a Mortgage Loan
The function of a loan underwriter is not to offer the loan, but to assess your ability to pay. Part of that analysis involves your capacity to pay. This will be based on your income and expenditure. The self-employed have most problems in this respect. That is because they are not guaranteed a regular income.
Employed people receive an income each month. If you are paid on the same date each month then the mortgage repayment can be arranged to be paid by direct debit every pay
day. Without a guaranteed regular income, the capacity to pay a mortgage loan will be diminished in the eyes of the mortgage underwriter.
Your type of employment and security of employment are also factors in mortgage underwriting. If you work in a seasonal job, such as a holiday camp manager or in the vacation industry in general, then you will be a greater risk than a physician. An extreme example, perhaps, but it explains the type of concern important to loan underwriters.
Collateral to a Loan Underwriter
Mortgage underwriting involves security of the mortgage loan being offered. Collateral is a large part of the decision. In many cases, collateral is the security. An appraiser will determine the value of the real estate and the loan underwriter will take the ‘loan to value’ ratio into account. This is the amount of the loan relative the appraised value of the property.
Fundamentally, the collateral is the value of asset owned by the borrower. In mortgage terms, this will generally be the value of the home itself. That is why 100% mortgages are rare. In mortgage underwriting, the lender must be able to recover the capital in the event of the borrower defaulting on payments. A mortgage will be offered at a percentage of the purchase price – often 80%. This means a 20% deposit that the buyer would lose if they defaulted on the agreement.
Mortgage Underwriting: Summary
The decision to offer a mortgage will be based upon the analysis of the loan underwriter. This will take each of the above factors into consideration and perhaps some others. Mortgage underwriting is based on three factors. A combination of your credit record, your ability to pay and the security you can offer the lender. If you have a good record of making your mortgage or rental payments on time, then you should not have a problem.
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