Mortgage Articles

Underwriting your loan

There are 4 main factors that are used today by underwriters to determine a mortgage approval. These factors help a mortgage underwriter understand the borrower’s qualification. These factors determine if a borrower can receive a preapproval, prequalification, and meet necessary underwriting guidelines.

The first factor known to the American population is called the ‘credit’ criteria. Credit scores can help determine the risk level for interest rates, and private mortgage insurance (PMI). Credit scores over 720+ will help to receive the best interest rates, and credit scores of 620+ will help to avoid high PMI payments. FHA mortgage loans have no score requirement, but look towards the ‘credit worthiness’. Credit worthiness consists of how long the credit tradelines have been open, the quantity of credit tradelines, bankruptcies, foreclosures, judgments, and mortgage lates. A lot of borrowers are obtaining 700+ credit scores after filing for bankruptcy within two years! Every mortgage lender looks for 3-5 credit tradelines that have been opened for at least 24months. Superb credit consists of 5-7 tradelines that have been open for at least 4+years. Credit criteria is one of the first steps taken for preapprovals. Underwriting guidelines suggest strong credit history to make a high risk decision.

The second factor looked for is called ‘capacity’. Capacity is how much a borrower makes in income compared to his monthly debt obligations. It also consists of employment history whether it is stable or will be continuous. Self employment income requires two years of business tax returns with all schedules. Any commissions, bonuses, and overtime will need to have been received for two years, and would need to be averaged by two years. If these guidelines aren’t met, then it will not be included towards a borrower’s income. Income earnings can be verified by last paystubs covering 30 days, last two years of w-2’s, and last two years of full tax returns. Alimony, child support, social security, and disability would need to have been received for the last 3months, and have a continuance period of 3yrs. This step is commonly used to prequalify a borrower. Income is calculated against the debt, and no credit is pulled to prequalify a borrower.

The third factor used in a mortgage approval is called ‘capital’. Capital is how much ‘liquid assets’ a borrower may have to cover the down payment, closing costs, and monthly reserves. Liquid assets consists of checking, savings, 401k, IRA’s, stocks, bonds, mutual funds, and certificates of deposits. The amount used for 401k’s is 70% of the ‘vested balance’ minus any loans against it. Down payments can help lower the interest rate by lowering the loan-to-value (LTV). FHA purchase mortgage loans required a down payment of 3%, and conforming loans are from 5, 10, and 20% down. MyCommunity mortgage & HomePossible mortgages are zero down programs, but will require a 620 credit score to avoid high PMI payments. This is the 2nd step used to prequalify an individual for a mortgage. Automated underwriting guidelines tend to ease up when large assets are present.

The last factor used in a mortgage approval process is called ‘collateral’. The Collateral factor looks at the subject property of the mortgage loan. The mortgage rates can receive price hits due to the subject property being a high rise condo, co-op, Non-warrantable condo, second home, investment property, timeshare, rural area, log cabin, and if there aren’t any comparable homes in the area. Most appraisals require at least three comparable homes to find the value of a subject property. This step isn’t required for preapprovals or to prequalify a borrower. Underwriting guidelines are very strict when the market values are declining. New VA home Purchases has the strictest type of appraisal, and can be overwhelming if the home is over 10yrs of age.