What Underwriters Consider in Evaluating Loans

For most people, buying a new home also means getting a mortgage. The person working behind the scenes on your mortgage is called an underwriter. The underwriter reviews all of your paperwork, evaluates your financial situation, and ultimately ensures that you will be able to meet the defined loan obligations.

After the housing crisis during the mid-2000’s, the Consumer Financial Protection Bureau put rules in place to protect borrowers. One of the main goals of these rules is to make sure you, as the borrower, are qualified for the loan. This is important so that you don’t get into a situation where you’re “over your head” and can’t pay your mortgage.  This is where the underwriters come in.

Here are some of the things that they will be checking when they review your application and all of the supporting information:

1. Credit history: One of the first things they will look at is your past track record of paying debt. They will evaluate your willingness to meet financial obligations in a timely manner. Even if you have a good income, prior delinquencies are likely to have an adverse effect.
2. Cash available to close and reserves: The more money you have in savings, the more favorably underwriters will consider your application. In addition to having a larger deposit, you will also be demonstrating your ability to keep a positive cash flow and plan well financially. All of this makes the loan less risky.
3. Employment history: While much of the approval process is about the numbers, the underwriter must also evaluate “perceived risk.” Regardless of your current income, they will look at the type of job you have, how long you have been with your current employer and length of time in your current profession.
4. Debt-to-income ratio: Although there are some variances with different programs, typical guidelines dictate that your mortgage plus other debt shouldn’t exceed 41 percent of your gross income. That said, you will have a better chance of being approved if the ratio is off due to low income vs. high credit card balances or debt on luxury items.
5. The home’s condition and value: During the home purchase process, you will likely have an appraisal complete. The underwriter will check to make sure that the value of the home matches the loan amount. They will take into consideration the age, condition, location, and other factors.

Thinking about new home construction? LaMontagne has the help you need to get started! Take the first step toward your home buying goal with our financial advisors.