When you apply for a mortgage, you work with a loan officer or mortgage broker. This is your contact as you move through the process of mortgage approval and funding. You hear all about your options and talk about terms. But what is going on behind the scenes? In reality, the person who is truly in charge of approving your mortgage is the underwriter.
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What is a Mortgage Underwriter?
The mortgage underwriter is the person who assesses the terms of the loan and who looks at the borrower to determine the risk of default. If you don’t seem like a good risk, your loan won’t be ultimately approved. In some cases, what an underwriter finds while working on the loan paperwork can prevent your mortgage from closing, even at the last minute. One of the reasons that it can take a while for a home sale to close is because, before the lender will take a final risk by sending the money, the mortgage underwriter has to look at the loan and approve it.
Your lender is putting up hundreds of thousands of dollars on your behalf. It’s important that you prove you can repay the debt.
What Factors Does a Mortgage Underwriter Consider?
When considering a loan, the mortgage underwriter evaluates what are known as the “three C’s of underwriting”:
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- Credit: What is your credit score? One of the most important factors when approving a mortgage loan is your credit history. A high credit score indicates that you are more likely to repay your debt. A lower score indicates a potential to default. If your credit score doesn’t meet specific requirements, the underwriter might not offer a stamp of approval for the loan.
- Capacity: This is your ability to pay the debt. Do you have a high enough income to handle the monthly mortgage payments? Is your income regular? Also, are there other debt payments involved that might detract from your ability to pay? If so, you might not be approved for the mortgage loan if your debt to income ratio is too high.
- Collateral: The value of the home involved is also a big consideration for a mortgage underwriter. If you do end up defaulting on the loan, and the lender has to retain ownership of the property, it’s important to be able to recover as much money as possible from the property. On top of that, the underwriter looks at the appraisal report and compares it to the values of similar properties and nearby homes.
Lenders have different rules for determining whether or not a loan will be approved. Some lenders are willing to work with buyers who have poor credit, and who might have a higher debt to income ratio. Other lenders are stricter and expect to see excellent credit and a low amount of debt to reduce risk.
Other items that a mortgage underwriter might look at (depending on lender requirements) when determining final approval for a loan include:
- Survey: Are the property boundaries as described? A professional survey can remove doubt. This is important if you want to avoid entanglements over contested property. The lender doesn’t want those issues, either, because it can mean a problem down the road if you aren’t careful (and it increases the risk to the lender).
- Flood Certification: Because flood coverage isn’t part of your regular home insurance policy, lenders worry that a flood could mean that you can’t afford your home. The lender loses out. As a result, a mortgage underwriter might study the issue. If you are in a flood zone, you might be required to buy flood insurance before your loan is approved.
- Title Information: Your mortgage underwriter will review the information from a title company about the legal status of your property. A title search will bring up prior claims on the property, and title insurance protects the accuracy of the work, just in case something comes up later. If your property has legal problems associated with it, your loan might not be approved.
The mortgage underwriter plays an important role in the home buying process. You might never meet your mortgage underwriter, but s/he is at the heart of the process. It’s about making sure that you are capable of repaying the loan before the lender commits the money.