Mortgage underwriting is the process whereby lenders look at an applicant’s debt burden, income, and financial history. This helps the lender decide whether or not the applicant is a good risk. While you won’t be privy to this process, it is still a good idea to understand how it works, so you can avoid being turned down for a mortgage.
Assessing Risk
The main job of a mortgage underwriter is to assess how much of a risk you are. Lenders are handing over significant sums of money to people when they give them a mortgage, so the last thing the lender wants is to lose money, which will likely happen if the borrower defaults on the loan. While a mortgage is secured on a property, selling a foreclosed property generally yields a lower price than full market value. The lender might not be able to recoup the difference between the debt owed and what the sale makes, so they essentially lose money.
An underwriter looks at all aspects of your financial history to help them make a lending decision. Someone with a strong credit score, very little existing debt, a good income, and a secure job is a low-risk applicant. Another person with a poor credit history, a part-time income, and a high debt burden would be considered a high-risk applicant.
Stricter Lending Criteria Post-2008
There are various guidelines in place to help lenders make a lending decision. Fannie Mae, which was bailed out by the government for $191 billion after the sub-prime mortgage meltdown in 2008, now has extremely strict lending guidelines. Applicants applying to Fannie Mae need a credit score of 640+ and an LTV of 97%, among other things. Many other mainstream lenders also have stricter lending criteria.
Other smaller lenders may have less stringent guidelines, depending on their appetite for risk. There are also specialist mortgage lenders that offer products for higher-risk borrowers. These usually have higher interest rates and stricter lending criteria, to offset the increased risk exposure for the lender.
Be Prepared
It is sensible to have all your ducks in a row before you apply for a mortgage. Obtain a copy of your credit history and check it to make sure there are no unexpected entries. Mistakes on a credit record can scupper a mortgage application. Lenders are also leery if you have a high credit utilization score.
Make sure you have your debt under control. Too much debt is a red flag to lenders. Start paying down debt before you consider a mortgage.
Lenders will look at your income and outgoings. If your cash flow is low each month, and you have very little money left over after bills and debt repayments are made, the underwriter may refuse your application.
Work With A Mortgage Broker
Indiana mortgage brokers understand the underwriting process and can help match you with a lender that suits your circumstances. Working with an experienced broker will greatly improve your chances of obtaining a mortgage.
Finally, always be honest when applying for a mortgage. Lenders have access to a lot of data and won’t be sympathetic if you try and hide debt or overstate your income.
