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What Is Mortgage Underwriting?

By Jim Micheals

Things to know about mortgage underwriting – the three primary risks lenders consider when deciding to approve or deny a mortgage.

Mortgage underwriting is the process by which lenders determine the risk of lending to a specific borrower. Underwriting assesses the likelihood that the borrower will default. Once lenders determine that risk, they can decide if it’s acceptable and thus, whether to approve or deny. Broadly, risks fall into three categories: credit, capacity, and collateral.

Credit

Credit history is very important during mortgage underwriting. The underwriter uses it as a guide to how well the borrower currently manages his or her debts. They will run credit reports from all three reporting bureaus, Equifax, Experian, and Transunion. Reports contain information like credit score, public information such as a bankruptcy, and details of current and past credit cards, loans, collections, repossessions, and foreclosures. Lenders recognize that credit history is highly correlated with the likelihood of the borrower defaulting. Most important of all is information on one’s current housing, especially a current mortgage.

Capacity

Underwriters consider a borrower’s capacity to pay the mortgage, that is, his or her ability to make monthly payments. Underwriters analyze the borrower’s income, employment, and current assets and debts. Of special importance is the stability of one’s income. People with stable jobs are more likely to reliably make their payments. Borrowers who have liquid assets are also more likely to make payments, so lenders may require a number of months of payments in cash reserves.

Collateral

During mortgage underwriting, lenders also analyze the value of the collateral, or the property itself. Underwriters calculate the ratio of the loan amount to the property’s actual value (LTV). The higher the LTV ratio, the riskier the loan. If the LTV is high, the lender may require mortgage insurance to offset that extra risk.

After running all these numbers, the mortgage underwriter considers the totality of the risk and determines final approval or denial.

Related posts:

1. What Are The Duties Of An Underwriter On A Mortgage Loan?
2. What Is Involved In The Mortgage Underwriting Process?
3. How Does My Debt To Income Ratio Affect My Mortgage Rate?
4. Does My Debt To Income Ratio Affect My Mortgage Rate?
5. What Do Mortgage Loan Processors Do?