When a person applies for a loan, the application could be either accepted or rejected. This is based on the criteria of whether the applicant is stable financially and whether he/she is a reliable person to do the payments on time. An underwriter is the one responsible to review the application to assess the lending risk to a borrower. Through the mortgage underwriting process, the lender could be protected from any form of defaults and also helps the borrower not to enter a loan that they cannot handle.
Things to Consider in Loan Underwriting Process
During the loan underwriting process, there are three things to be considered. The underwriters should review the credit, capacity, and collateral of the borrower. Based on their review process or assessment, the underwriters determine whether the loan application of the borrower fits the qualifications and guidelines for the loan being requested.
Through the mortgage underwriting process, the underwriter checks out the credit history and score of the borrower. This helps to predict the ability of the borrower to perform the payments promptly and in full. How better the applicant has paid the debt in their past would be a great indicator of how well they would continue to perform it in the future.
An important part in mortgage approval process is credit history. Credits scores are estimated based upon the credit types, length of the credit history, history of payments, and the amounts being owned. Normally, the underwriter weighs the amount owned and the payment history most importantly.
By assessing the capacity, it is meant to answer the question, whether the borrower could pay the debt after the mortgage approval process. Capacity is usually estimated based upon employment, current debts, and income. These estimations determine whether it is possible for the borrower or not to afford the payment of the new mortgage being requested.
Here the debt-to-income ratio is the crucial factor to be considered to understand the capacity of the borrower to perform the repayment of the debt. They are calculated based upon the gross income of the borrower versus the expenses going outside. A low debt-to-income ratio would determine that the borrower can perform the current loan satisfactorily.
Also, through the loan underwriting process, the underwriter’s asses the savings and accounts to determine whether the applicant would be able to pay the loan amount even when they lose their job or become ill.
The property which is being purchased by the borrower is their collateral. Always the underwriter during the mortgage underwriting process, considers the value of the property to check whether the loan amount does not exceed the property value. A perfect loan amount would protect the applicant from not paying the payments.
The above three factors are to be considered in the mortgage underwriting process. While preparing for a mortgage approval process, protect the credit, lower the debt-to-income ratio and ensure the stability of your employment.
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