Contract to Close: Mortgage Underwriting

Before going under contract to purchase a property, you most likely began a prequalification process with a lender in order to obtain your pre-qual letter (if not the seller who accepted your offer without one is a very trusting person). Now that you’re under contract and actually applying for a loan, the mortgage underwriting process will determine whether your loan application is accepted, suspended, or declined. Obviously acceptance is what you’re looking for as not obtaining a mortgage kills the deal for most people, but if you don’t get it you may be able to have another lender approve and perform the mortgage.

As mentioned in another post, your personal credit score is a large factor. The underwriter will also assess your ability to make the loan payments based on factors like your debt-to-income ratio, your salary, and your assets and cash reserves. The underwriter will also take into account your history of handling large debts and whether you were delinquent on home mortgages in the past. This will be evaluated in tandem with the type of loan and the loan-to-value ratio (how much of the purchase price you are paying for with loaned money).

Along with assessing your ability to repay, the underwriter will also consider the value of the property and what it will be used for (ex. If you will live there as your primary residence, use it as a vacation home, or if you plan to rent it out to tenants).

A mortgage underwriter will not make a decision based on any one factor (unless your credit is too low) but will consider all of these factors together to get a sort of composite risk assessment. If you are borderline a more in depth look might explore factors such as how long you have been at your job, etc. The underwriter is essentially trying to make sure the bank is not making an investment that is too risky. If the bank is unable to sell your loan and you stop making payments so that it has to go through the trouble of foreclosing and selling the property, it is a bad situation from the bank’s perspective.

Mortgage underwriters make decisions for banks to put up large amounts of money, and even though they serve the interests of the banks their doing this role responsibly also protects the economy form recessions like that of 2008 as well.