What is Mortgage Underwriting?
Underwriting is the process of having a third party accepts funds to absorb the risk of loss in value of merchandise. Mortgage underwriting is the calculation of the amount of risk of loss or damage to the asset. When a bank is issuing a mortgage, the asset or property is subject to an evaluation to determine the value of the asset.
In mortgage underwriting, the financial analyst's job is to review the publicly available information and make a decision on the risk to the bank and the creditworthiness of the borrower. A credit analysis of the purchaser is completed is used in the mortgage underwriting process.
There are several calculations completed by the mortgage underwriting department to evaluate the level of risk to the bank. The debt service ratio provides a ratio of the borrower's income to their monthly debt obligations. A value between 0 and 35% is an acceptable value for most financial institutions. Any greater than this is considered high risk, based on the statistical analysis done by the mortgage underwriting department.
The mortgage qualification amount is also a calculation. The total value of the property should not exceed three times your gross annual salary. Requests over this amount mean that a greater risk to the bank. These values are based on prior analysis and are consistent across most financial institutions.
Mortgage underwriting can also refer to commercial property, development companies planning to build new real estate. A developer finances the purchase of land or property with a mortgage. A proposal must be submitted to the bank so that the mortgage underwriting department can review the details and evaluate the probability of success, the level of risk for the financial institution and what can be done to mitigate those risks.
If you apply for a mortgage and are rejected, is it due to the decisions made in the mortgage underwriting department. It is the responsibility of the underwriters to review each mortgage application and ensure that all the required documentation is provided and check the ratios and scores calculated by the loan evaluation software.
Every financial institution has a computer software program that analyzes the data related to a request for financing. During the mortgage underwriting process, the annual income, total liabilities, liquid assets, secured and unsecured debt and the value of the house are reviewed. The credit score is added to the process, along with the debt service ratio to arrive at a reasonably accurate evaluation of the risk to the financial institution.
The importance of the credit score cannot be overemphasized. The credit score provides the financial institution with insight into your payment history and your money management skills. Obtain your credit report and score at least once a year.
If you are planning on applying for a mortgage, do not apply for any new credit a minimum of six months prior. The number of inquiries tells lenders if you are actively seeking credit to manage your financial obligations and living expenses. Be prepared to show the last 3 months of bank statements, with no insufficient funds bank charges.
Improving your credit score reduces your risk to the bank, and allows the mortgage underwriters to recommend a lower interest rate.
Written by Carol Francois
