If you’ve been working with a loan officer during the final stages of your loan process, you more than likely have heard the term “Underwriter”. Do you know what underwriters are looking for when they are gleaning your application, life history and purchase agreement?
I always pictured underwriters as beings on a cloud, wand in hand ready to grant or dispel home mortgage funding. Gods, if you will. You give and give and give tons of paper and your utter most personal and financial information. On a good day you could get your loan funded, on a not so good, you may be going back to square one. But these beings have your hopes and future in their pen.
We ALL know, underwriters are looking at the best interest of the lending institution, but they could be considered to also be looking in YOUR best interest. What IF what lines up doesn’t make the best financial rational to be purchasing your home. Frustrating as it is, it could be the case. So, the best thing to do is get all your ducks in a row before you take off.
The article I read, “The 4 C’s of Mortgage Underwriting,” defines the basic needs of lenders as Capacity, Credit, Cash and Collateral. Individually, they can vary from underwriter to underwriter, but the basic premise remains.
Capacity – Income to Debt. Does the would-be borrow have enough cash to pay the mortgage? There are two calculations that are taking into consideration:
Housing Ratio (or Front end ratio): PITI divided by your pre-tax income. PITI is the Principal of the Mortgage, Interest of the Mortgage, Property Taxes and Home Insurance all rolled up into one figure/payment. (This could also include PMI and FHA MIP). The best case scenario would be if the ratio to the PITI/Pre-Tax Income falls at 28% or less.
Debt Ratio (or Back end ratio): This is your mortgage payment added to the debt you already have like auto loans, student loans, minimum credit card payments and anything else which shows up on your credit report. Your other monthly expenses like your cell phone and other utilities are not factored in. Ideally, your back end ration should be 40% of less.
Now, remember, these are not guidelines and your lender and individual underwriter have the last say, but this is to get you prepared.
Credit – Will your past payment history foretell how you will make future payments? Underwriters will look at your payment history, how much debt you have right now and how much debt is available to you. (Do you have credit cards that you have $15,000 available to you? Yup, they look at that.) They also look at what types of monies available to you, revolving credit vs. outstanding payments to be made monthly and above all, how much debt you have. This is all spelled out on your credit report. The higher your score is, then lender sees you as less of a risk.
Cash – The underwriters want to see what you will have available after you would close on your home. This boils down in how much skin you have in the game. The larger the down payment made on the home (this does not include your lending closing costs – just strictly what you pay down on the original offer price), the less you will default and just tuck tail running away from your home. Other things are taken into consideration of whether the down payment was a gift, another loan or taken from your savings. The latter is more acceptable in an underwriter’s eyes. Since cash is king, let you lender know exactly how much money you have on hand and in investments.
Collateral – Your home’s appraised value which is based on other LIKE homes which have sold recently in your purchase area, the actual location of the home you have your offer on, and many other factors. Contrary to popular belief, lenders do not want to get your home back; HOWEVER, they want to make sure it’s something they’d ACCEPT back and can resale quickly, if you do default. Appraisals are ordered by your lender after the application of the loan and accepted purchase agreement and closing. It is VERY time sensitive and even an appraisal done six months earlier may be unacceptable. So, there’s no real way you know how a home will appraise, until an appraiser is sent out.
The underwriter will take all four of these into consideration to determine if your loan will be funded. However, if you make sure you have a handle on your income, debt and clean credit, before you start looking for a home and loan, you should have no problem getting approval from Underwriting.
To help you navigate through the home loan process, contact Marci Pipes today! She’s the best loan officer in the Salt Lake City area and someone who can help you every step of the way when financing your home.
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