Mortgage underwriting: A way to judge creditworthiness

Mortgage underwriting is the process of evaluating a borrower's financial capacity to repay a loan. If you are a borrower, then the lender verifies the following things:

• Income


• Employment status


• Assets


• Credit standing

This determines whether or not you are creditworthy and are capable of paying off the mortgage loan.


The work of an underwriter also involves an appraisal of the property value.

Generally, lenders appoint underwriters to verify the information provided in your loan application and other related documents. They may also contact your employer to verify your role in the work area and your income at that position. Based on the evaluation, the underwriter decides whether the mortgage application should be approved or rejected. The mortgage loan underwriter also predicts the rate and term of the loan that are suitable for providing a certain loan amount. Usually lenders look into three areas before approving a loan amount. These include:

• Financial strength:
  Lenders take into account your income and payment towards debt before approving your loan. They require your mortgage expenses not to exceed 25% to 28% of your monthly gross income. Your total debt payments should be limited to 36% of the gross monthly income. Lenders review your W-2 forms, recent pay stubs and tax returns of last two years. They also consider the cash reserves in your bank, your social security allowance and extra income etc.
  
  
• Credit history:
  A fair credit history helps in your loan approval. Lenders verify whether you have made any late payment or filed bankruptcy in the past. They also check out whether your property has been in foreclosure or any judgement has been issued against you. Your credit report helps you to access all such information. Your credit score gives an assessment of your ability to manage credit. It is provided by any of the credit reporting agencies such as the Equifax, Experian or the Trans Union. It is better that you know what is being provided in your credit report, so that you can check out for errors, if any.
  
  
• Property:
  Lenders review your property type, your home value and the amount you can pay as the down payment. They generally offer not more than 95% of the appraised value or the sales price, whichever is less. They often verify the source of the down payment. In most cases, lenders expect a down payment of 10% to 20% of the sales price or appraised value, whichever is the least.
  

Thus, mortgage underwriting helps to decide upon the loan amount and the interest rate that provide the least risk in offering the mortgage. A fair underwriting report reflects a better financial position and good credit score. So before you apply for a loan, just check out with these elements so that you can improve your income and credit status and thus can increase your chances of loan approval.




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