The term "underwriting" refers to the process that leads to a final loan approval or denial, which is determined by a professional underwriter. Many factors are at play in a lender's final decision on a mortgage loan. These factors are all analyzed during the underwriting process through specialized software programs.
Application
Filing a formal application for the loan is the first step in the underwriting process. This generally includes submitting evidence of current income and current assets, along with estimates of existing debt obligations and a current credit score. Next, the property's value is determined by an appraiser and a title search is completed to ensure there are no liens against the property. After these steps, the loan can move to the underwriting phase.
Credit Review
Your credit score and history heavily affect whether you will be approved for a mortgage loan. Through underwriting, the complete credit report is analyzed. The type of credit you possess, the way you use it and any red flags are considered. The better your credit, the more likely you are to be approved. Every lender is different, but some are more lenient than others when it comes to a few late payments over the course of your credit history.
Income to Debt Ratio
Another factor analyzed in the underwriting process is your income-to-debt ratio. This is simply the amount of monthly expenses you have divided by the amount of monthly income. For example, your proposed mortgage payment is $1,200 and additional debts -- such as auto loans, student loans, and credit cards -- require monthly payments totaling $500. If you make $5,000 a month, the ratio is determined by dividing $1,700 by $5,000, which equals 34 percent. The lower the ratio, the better. This shows the lender you have additional funds coming in each month and are not overextending yourself.
Income Verification
You will most likely be required to provide some type of income verification to the lender, such as an official pay stub showing your year-to-date earnings. This is generally enough proof if you work a typical job, receiving biweekly or weekly pay. If you have an unconventional job with varying income or you work on commission you may need other forms of verification. Accepted documents might include tax returns, bank statements and accounting records if you are self-employed.
Approval Decision
Once the underwriter has reviewed all the necessary information and documents, he will make a decision on the loan application. There are a few possible outcomes at this point. The loan can be approved outright or the lender may determine that conditions must be fulfilled before the application can be approved. For example, you might be required to provide additional verification of income or conclude the sale of your current property. The loan might be denied if the borrowers do not meet underwriting requirements. If you are denied for a mortgage loan, the lender will send an explanation of the decision.