Mortgage Underwriter
The purpose of a mortgage underwriter is to assess the risk involved in a specific real estate loan. The term "underwriter" dates to the British insurance company, Lloyds of London, who originally insured sea voyages. At that time, the insurer literally wrote his name underneath the risk information on an official slip of paper. Today, the mortgage underwriter uses computer technology to make an initial determination of eligibility, although it remains the responsibility of the underwriter to make the final determination. In general, the mortgage underwriter looks for the "three Cs" before granting a mortgage loan.
Credit
Lenders look for a high credit score on the borrower's credit report.
Research has shown that those with a history of paying monthly obligations
on time are likely to do so in the future. Most mortgage lenders give the
greatest weight the borrower's history of paying housing costs on time.
Some lenders are willing to provide mortgages at higher interest rates to borrowers with a poor credit history. However, the mortgage underwriter may require that one to two years of on-time payments be established before the loan is approved. It is also common for the lender to require that old delinquencies, judgments and charge-offs be settled before the loan can close.
Capacity
The mortgage underwriter will also consider the borrower's financial
ability to repay the loan. This can be a tricky determination to make,
particularly if the borrower is self-employed or works on a commission
basis. Many lenders require those with unusual income streams to provide
two years of tax returns in order to demonstrate stability of earnings.
The borrower's debt-to-income ratio must fall below a certain percentage, which is set by the individual lender. The housing-to-income ratio is also considered. The mortgage underwriter may also look at the borrower's available assets. It is not uncommon to require two to twelve months' expenses to be available in liquid assets to cover short periods of emergency.
Collateral
In addition to investigating the borrower, the mortgage underwriter will
also examine the property. There must be a reasonable expectation that,
should the borrower default, the lender will be able to sell the property
to recoup its losses. The home is typically appraised, and the mortgage
value set at a portion of the appraised value.
The Bottom Line
Although all three of the above factors affect the final decision of the
mortgage underwriter, borrowers should be aware that each case is handled
individually. Non-conforming loans are mortgages offered to those who do
not meet the standard guidelines in all three areas. These loans may carry
a slightly higher interest rate than conventional loans, but are a
reasonable way for those with nontraditional profiles to purchase a home.
An experienced loan officer or mortgage broker can help guide the consumer
through the underwriting process to find the loan that is best for him or
her.
