What Makes Up The Mortgage Underwriting Process?
The underwriting process evaluates your current finances and past credit decisions. During the underwriting process, your underwriter looks at four areas to get a more complete picture of your financial situation:
Income
Your underwriter must verify you earn enough income to cover your monthly mortgage payments. To confirm your financial readiness, you must provide three types of documents to verify your income: W-2s from the last 2 years, your two most recent bank statements and your two most recent pay stubs.
Are you self-employed? Do you own a sizable share in a business? You’ll need to furnish a few documents in place ofW-2s: profit and loss statements, K-1s, balance sheets and your personal and business tax returns.
Your underwriter will check that your income matches your reported income and verify your employment status with your employer.
Appraisal
Appraisals are almost always required when you purchase a home. They protect you and your lender because an appraisal can ensure you only borrow what the home is worth.
A professional appraiser will inspect the property, walking through the home to take pictures and measurements to evaluate the home’s condition and features to determine the home’s value. The appraiser compares the home toproperties in the area that are similar in size and have similar features. The appraiser’s real estate comps must've been sold within the past 6 months and ideally located within a mile of the property – unless the property is in a rural area.
After the appraiser determines the property’s value, the underwriter will compare the appraised amount to the mortgage loan amount. Your underwriter may suspend the application if the home is valued less than the mortgage amount. In this situation, you can contest the appraisal, negotiate with the seller to lower the purchase price, come up with the difference on your own or walk away from the property.
Credit
An underwriter also evaluates your credit score. Your credit score, a crucial three-digit number, represents how reliablyyou repay debt. A good credit score signals that you pay back your debts on time, and that can help you qualify for a lower interest rate.
The minimum credit score you’ll need will depend on the type of loan you apply for. For a conventional loan, your minimum credit score should be at least 620.
If you apply for a Federal Housing Administration (FHA) loan, the minimum credit score is 580 or 500 with a 10% down payment. A Department of Veterans Affairs (VA) loan has no minimum credit score requirement, but some lenders may set their own minimum credit score.
Your underwriter will also pull your credit report to review your payment history, your credit usage and the age of your accounts.
Debt-To-Income Ratio
The underwriter must also determine your debt-to-income ratio, the total amount of money you spend on bills and expenses each month divided by your gross monthly income (pretax income). Lenders prefer a DTI ratio at or below 50%.
Here’s an example of how to calculate DTI: Let’s say you earn $5,000 a month and spend $1,400 in rent, $300 on an auto loan and $400 in student loan payments.
Divide $2,100 (your combined monthly debt) by $5,000 to determine your DTI ratio, which, in this case, is 0.42, or 42%.
Asset Information
Your assets can help increase your chances of mortgage approval because you can sell them for cash, which can help supplement your income if you experience financial hardship. An underwriter will likely review your checking and savings accounts, real estate, stocks and personal property.
Since closing costs can range from 3% – 6% of the total loan amount, lenders also use assets to ensure you can cover your mortgage payments after paying your closing costs.
