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Understanding Underwriting

You know all the paperwork we have to get like bank statements and pay stubs... you know the mound of documents just short of DNA samples and blood work?  It's all to prepare you for underwriting.   Underwriting is the most vital part of the loan process since underwriting will determine if you are approved or declined for your new home mortgage.  


To put it simply the underwriter must determine the borrowers ability and willingness to repay a loan obligation.  


ABILITY is determined by your documented income and assets.  To put it simply you have to earn enough income to be able to afford to pay back the new home loan and be within the debt ratio standards set by the underwriting guidelines.   This step is primarily achieved by verifying an income amount and the likelihood it will continue and remain stable. 

They look to answer the question: Do you have the ability to pay the monthly mortgage now and in the future?  

The second part is verifying that the assets you have are sufficient to meet the requirements for down payment and closing costs as well as any reserves if required.  To be used all funds must be verified and sourced as your funds.  They have to determine that the funds are legally obtained and not attached to any debt or repayment. 

These answers are typically determined by a series of mathematical equations using debt ratios and liquidity percentages. 

WILLINGNESS is primarily determined by your credit report profile.  The underwriter is trying to determine how willing you are to repay your debts and obligations.  A long history of making your payments on time indicates a high likelihood that this will continue.   A lack of credit profile or shorter credit history may require some additional information for the underwriter to feel comfortable.  A poor history of repaying your debts or making your payments on time indicates a poor willingness to repay and we will have to provide explanations to the underwriter regarding the circumstances that created these blemishes and how these circumstances have been corrected.

Underwriting today relies heavily on your credit scores as an initial indicator of your credit-worthiness and most lending guidelines will have minimum standards regarding credit scores that must be met.  

Today's mortgage process also runs each file through an Automated Underwriting System (AUS) which uses trended data and algorithms to determine a clients willingness or likelihood to repay their mortgage obligation.  These system weigh credit scores, debt ratios, assets and reserves as well as other compensating factors and indicate a higher likelihood of repayment when accepted.  In some cases underwriters can manually underwrite the file and override the AUS decision when extenuating circumstances exist. 

COLLATERAL -The last item that the underwriter has to review will be the property.  They must determine that the collateral for the loan (property) meets the value given with regard to the loan amount and that the condition of the property is acceptable and structurally sound. 

The underwriting process is fairly complex and has a lot of small details that they review and consider

but in the simplest form it's all about your Ability and Willingness! 

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