Understand How A Mortgage Application Gets Reviewed and Qualified

So you’ve finally decided to take the plunge and buy a new house. Ever wondered what goes on behind the scenes and what the questions, qualifications and factors are that make the difference between an approval and denial?

Given that our mission is to supply the community with tools and education and to enable everyone to be an informed, education and empowered consumer, here we will give an overview of how an underwriter analyzes an application (AKA the person who decides on the outcome of your application). Each week, we will explain each factor/C in depth – so be on the lookout for our inserts each week!

“The 4 C’s of Underwriting”- Credit, Capacity, Collateral and Capital. Guidelines and risk tolerances change, but the core criteria do not.

Credit

Credit… the dreaded word! The truth is, the number behind your credit score doesn’t need to be such a mystery.

Credit refers to the prediction of a borrower’s repayment based on the analysis of their past credit repayment. To determine an applicant’s credit score, lenders will use the middle of the three credit scores reported by the three credit bureaus (Transunion, Equifax, & Experian).

By reviewing one’s financial factors, such as payment history, total debt compared to total available debt, the types of debt (revolving credit vs. installment debt outstanding), a credit score is given each borrower which reflects the probability of well managed and repaid debt. A higher score tells a lender that there is a lower risk, which results in a better rate and term for the borrower. The lender will look to run credit early on, to see what challenges may (or may not) present themselves.

Capacity

In addition to reviewing an applicant’s credit, lenders want to analyze their ability to repay the mortgage over time. Capacity is the analysis of comparing a borrower’s income to their debt. The primary tool they use for this analysis is a debt-to-income ratio. Simply put, the debt-to-income ratio is the sum of all monthly payment obligations an applicant has (including the potential upcoming housing payment) divided by their gross monthly income.

However, keep in mind every application is different. Consult a Mortgage Advisor to determine how the underwriter will calculate your numbers.

Collateral

Collateral refers to the security of your loan in case of any issue that may arise that prevents repayments.

This is usually done through the appraisal of your home. An appraisal considers many factors – sales of comparable homes, location of the home, size of the home, condition of the home, cost to rebuild the home, and even rental income options. Obviously, the lender does not want to foreclose (they aren’t in the real estate business!) but they do need to have something to secure the loan, in case the payments stops (also known as default).

Capital/Cash

Capital is a review of your finances after you close. There are two separate parts here – cash in the deal and cash in reserves.

Cash in reserves: Important considerations for a lender are: Does an applicant have a financial cushion to fall back on if their income is unexpectedly interrupted for a period of time? Has the applicant shown a pattern and habit of saving money over time? Do they have capital accounts with liquid assets that a borrower could access if need be?

Cash in the deal: Simply put, the more of your own money involved, the stronger the loan application. At the same time, the more money you have after closing, the less likely you are to default. Two prospective borrowers that each have the same income and credit scores have different risk levels if one has $100,000 after closing and the other has $100. Makes sense, doesn’t it?

Each of the 4 C’s are important, but it’s really the combination of them that is key. Strong income ratios and a large down payment can balance out some credit issues. Similarly, strong credit histories help higher ratios and good credit and income can overcome lesser down payments. Talk openly and freely with your Mortgage Advisor. They are on your side, advocating for you and looking to structure your loan as favorably as possible!

3 Comments

  • Martin Moore
    Posted June 27, 2017 3:03 pm 0Likes

    Never have I ever thought that using this type of services is going to bring me additional rewards, points and joy! Thanks for the great experience

    • Jhon Miller
      Posted June 27, 2017 3:07 pm 0Likes

      I like how fast and professional your tech support team is. All of my requests were addressed in time taken care of properly. i would definitely recommend your services to everyone

      • Mark Chapman
        Posted June 27, 2017 3:08 pm 0Likes

        We appreciate your positive feedback!

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Frequently Asked Questions

Is a fixed-rate or adjustable-rate mortgage better?

Fixed-rate mortgages make sense for buyers when the current mortgage rate is low. This allows you to lock in the current rate and be protected from increases that are likely to take place over the next 30 years. If the current rate is high, an adjustable-rate mortgage may be better because rates can drop. It is good to remember that you will have the option to refinance in the future to take advantage of rate changes as well.

What goes into closing costs?

Fixed-rate mortgages make sense for buyers when the current mortgage rate is low. This allows you to lock in the current rate and be protected from increases that are likely to take place over the next 30 years. If the current rate is high, an adjustable-rate mortgage may be better because rates can drop. It is good to remember that you will have the option to refinance in the future to take advantage of rate changes as well.

What documents do I need when closing a loan?

Each lender requires slightly different financial records—this will depend on the type and amount of the loan you are applying for. However, there are some basic records all lenders will request. These include income records (i.e. pay stubs for the previous 30 days, the last two years of tax returns, 2 to 3 months of bank records for each of your bank accounts, and any other additional documents that prove your income). You will also need to furnish information about your current debts such as account numbers and monthly payment information.

Can I use 1st empire Elite Financial if I am not buying with Dr. Mortgage Real Estate?

Yes! We’d never want to exclude anyone from saving big bucks just because they’re not using Homie Real Estate services.

How quickly will the loan process be completed?

We don’t like to brag, but we usually have a quick turnaround time for most loans. You’ll be made aware of your loan progress ASAP

What are fixed-rate mortgages (FRMs) and adjustable-rate mortgages (ARMs)?

The interest rate for a fixed-rate mortgage is set in place over the life of the loan. On the other hand, an adjustable-rate mortgage can have its interest rate rise or fall during specified adjustment periods.

1st Empire Elite Financial is an Equal Housing Lender. As prohibited by federal law, we do not engage in business practices that discriminate on the basis of race, color, religion, national origin, sex, marital status, age (provided you have the capacity to enter into a binding contract), because all or part of your income may be derived from any public assistance program, or because you have, in good faith, exercised any right under the Consumer Credit Protection Act. The federal agency that administers our compliance with these federal laws is the Federal Trade Commission, Equal Credit Opportunity, Washington, DC, 20580.

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