Mortgage underwriting is easily explained. In essence, mortgage underwriting is logic based and supporting documentation is required. While, mortgage underwriters play a key role in moving your home loan from Application to Clear to Close- so do YOU! To ensure that you have a smooth home buying experience here are some common mortgage underwriting problems and how they may be avoided.
What is Underwriting?
Underwriting is the process by which an individual or institution assesses financial risk. Underwriting can involve loans, insurance, or investments.
Underwriters and a Mortgage
The most common type of loan underwriting is for a mortgage. The underwriter will assess the quality and risks related to a home loan based on the three C’s of underwriting: credit, capacity and collateral. Underwriters follow guidelines that analyze various aspects of the mortgage and provide a recommendation regarding the level of risk the mortgage will pose. Most lenders comply with underwriting guidelines of two institutions, the Federal Home Loan Mortgage Corporation (Freddie Mac) and the Federal National Mortgage Association (Fannie Mae). Freddie Mac and Fannie Mae are securitizers; meaning they take the loans they purchase and pool them into debt securities called mortgage-backed securities. They then sell these mortgage-backed securities to investors.
Is the Underwriter Always Right?
Short answer is YES! Long answer is YES! Good news! There are ways to ensure that the underwriting process goes smoothly. Be prepared for mortgage underwriting by avoiding these common problems that may arise:
*Credit History- Your credit history reflects fiscal responsibility. An underwriter is going to scrutinize your pattern of payment history, types of credit and inquiries. To avoid underwriting problems with credit history you should pay your debts on time, keep ratios low on credit limit to balance on revolving credit and don’t overuse credit. One installment loan and two revolving debts (with balances under 30% of the high credit) are looked upon favorably during the underwriting process.
*Income- Borrowers must have sufficient income to qualify for the loan size they seek. Lenders count income that can be documented through paperwork. So, if you are not sharing all of your earned income with “Uncle Sam” that may be a detriment when determining the maximum mortgage you qualify for. It may be prudent to avoid “writing off” parts of your income if you plan to buy a home. While you may pay more in taxes- you show more income, thereby qualifying for a larger loan size.
*Debt-to- Income- Debt-To-Income (or DTI) is a comparison of the amount of money you bring in to the amount of money going out. Student loans in deferment will be included in your DTI at a different rate depending on the type of home loan you qualify for.
*Reserves- Liquid funds, above and beyond the down payment, closing costs and pre-paid items may be required to serve as reserves. The term “house poor” comes to mind. Make sure that after you close on your home loan you will have money left in your “rainy day” account. This shows the underwriter that you are able to budget for the home loan you seek and are living within your means thereby minimizing risks of underwriting your mortgage.
*Funds sourced and seasoned- Monies for your home loan will need to be tracked and traced. The mortgage underwriter will ask that any out of the ordinary deposits be sourced. This means that a paper trail is required to determine the origins of the deposit. Some funds may also need to be “seasoned” in your bank account for a certain period of time. The best way to avoid this common mortgage underwriting problem is to ensure that monies in your accounts come from payroll and other easily sourced entities.
*Employment history- Rule of thumb- two years employment with the same business or in the same business is preferable. Short interruptions in employment may need to be explained via a Letter of Explanation.
It’s in Underwriting!
The underwriter is a critical member of your team when you are purchasing a home. Help the mortgage underwriter by avoiding some of the common problems and you will be helping yourself get to the closing table more quickly!
Kara Davis of Crew Lending will help you with all of your residential lending needs. She is a leading provider of mortgages in Lake Charles, Sulphur, Westlake and the entirety of Louisiana. She can also lend in 47 other states. Choose your lender carefully to ensure your smooth path to homeownership. Kara Davis will help you understand the loan process and work with you from Application to Clear to Close. For more information call Kara Davis at 337-842-0115.