Insula Capital Group

A Guide To The Mortgage Underwriting Process

Most people buy a home using mortgage financing; this allows them to pay the sum in manageable installments with interest. Before approving a loan request, mortgage lenders gauge the borrower’s creditworthiness—this process of approval is called mortgage underwriting.

Let’s learn more about the process of mortgage underwriting.

Mortgage underwriting—what is it?

The credit union, bank, or lender needs to determine whether the borrower would be able to repay the loan once they’re approved. The mortgage application is approved via underwriting.

Before the process begins, the mortgage broker or the loan officer collects the necessary documents for your mortgage application. The underwriter verifies the borrower’s identity, assesses the financial situation, and checks their credit history. This includes their cash reserves, financial assets, income, equity investment, and various other things.

 a home bought on mortgage financing

Manual Underwriting vs. Automated Underwriting

The underwriter may choose to assess and verify your mortgage application manually, or they can run the application through computer software to determine whether you should be approved for the mortgage. The latter process is known as automated underwriting.

As you may rightly think, automated underwriting is normally quicker than its manual counterpart. However, when software evaluates your application, it has a few limitations that might not be ideal for people with unusual circumstances, like those with a fluctuating income. In such cases, it’s usually better to evaluate the borrower’s application manually and take these factors into account.

Sometimes, lenders may use a mix of manual and automated underwriting to assess the borrower’s risk.

What is the job of a mortgage underwriter?

The underwriter’s main task is to evaluate the delinquency risk, which means the risk that the borrower might not be able to pay back the mortgage. The underwriter weighs a bunch of financial factors, including the following:

  • Credit report
  • Credit score
  • The value of the property you’re going to buy

The underwriter documents the assessments and considers different elements in your application to finalize whether the risk is acceptable.

Let’s look at one of Fannie Mae’s guidelines. A family house that will serve as the main residence assumes that the lender needs the following:

  • A loan-to-value ratio of 97% at most
  • A minimum credit score of 640
  • A debt-to-income ratio of 36% at most

If the person doesn’t meet one of the guidelines, they may still get the loan if the other two factors are strong enough or other financial factors such as the following come into play:

  • Whether they’ll occupy the premises
  • The amortization schedules
  • The type of house and units
  • Other financial assets or reserves (for example, retirement accounts, savings, investment accounts)

If you’re looking for private mortgage lenders, Insula Capital Group can help you. We also offer hard money construction loans, flip loan financing, and other loans. Contact us today to learn more about our financing services.