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Understanding Mortgages: What is Underwriting?

(8/1/2012) In the midst of one of the most uncertain real estate markets in history, it’s more important than ever to be informed. In a continuing series, we take a look at some of the most pressing questions about mortgages, refinancing, home equity, and other real estate options available to you.

When applying for a mortgage, there are several stages. In the pre-approval stage a broker or lender examines the eligibility and risk of extending a loan to borrowers. Once a property has been chosen, the approval stage involves a deeper analysis of a borrower’s capability to support a loan, and the obtaining of a favorable interest rate.

The approval process involves underwriting, in which a lender processes, analyzes, and verifies information on a mortgage application. Depending on which lender is identified by the realtor or mortgage broker, the underwriting process can vary in length and tasks. But generally , underwriting involves a few key processes.

The lender’s underwriters examine the borrower’s eligibility in detail, weighing the risks of extending a loan to a specific borrower by looking at:

Income, including type of work, length of employment, and likelihood of income staying consistent or increasing
Debt, including loans, leases, and credit cards
Tax history
Credit score, on a scale of 300 to 850
Credit history, including payment history, liens, judgements, bankruptcies, foreclosures, and others
Savings, including checking and savings accounts and retirement accounts
Debt to income ratio, with the goal of keeping a mortgage payment less than 30% of gross monthly income

Then underwriters analyze the different types of loans that a borrower qualifies for, ensuring an appropriate loan amount, term and rate for that specific borrower.

Underwriting has become even more important over the last few years, and lending standards have tightened. Lax lending practices in the past contributed to the subprime crisis and the housing bubble bursting. So lenders are looking for good candidates for loans, those borrowers with good credit, stability, and documentable income to make payments regularly.

For additional reading:

Underwriting Guidelines for the Average Mortgage: http://www.creditinfocenter.com/mortgage/guidelines.shtml

4 C’s of Mortgage Underwriting: http://www.kcmblog.com/2012/04/05/the-4-cs-of-mortgage-underwriting-2/

Get a Mortgage Despite Strict Underwriting: http://money.cnn.com/2011/07/05/real_estate/mortgage_underwriting/index.htm

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