Mortgage Explainer: What is Underwriting?
2020 08-07 | NFM TV
Your home loan has gone into Underwriting. Great news! Now, what is Underwriting? Find out exactly how your loan application is evaluated and used to determine if you qualify for the purchase of a home in this month's Mortgage Explainer.
Full Transcript is Below:
- [Narrator] Your home loan has gone into underwriting. Great news. Now, what is underwriting? Underwriting is the process that lenders use to determine whether you qualify for a mortgage loan. So how is your application evaluated? We use what are called the four C's. First, credit. The underwriter will pull your credit report based on information from the three major credit bureaus. They will analyze your credit history, payment history, number of open accounts, and the balances on those accounts. Your credit score gives the lender an idea of how well you manage debt. Second, capacity. Capacity is your ability to make the payments the new loan will require. The underwriter will evaluate your debt-to-income ratio which is your monthly debt divided by your gross monthly income. The lower your debt-to-income ratio, the more likely it is that you will be able to make mortgage payments. NFM also makes sure you're employed at the time of closing, with earnings that support the monthly income used to qualify. Third, collateral. Collateral is an item of value that is pledged for repayment of a loan, in this case, the property you're buying. The underwriter will look at the value of the house based on the appraisal, and comparable properties in the area, to the cost at which the house is being purchased. Finally, capital. Capital refers to your income and verifiable assets, such as retirement funds, checking, and savings accounts. Are you receiving a gift? Do you qualify for down payment assistance programs? Having a two year work history is important, too. If the borrower has less than a two year history we look to document gaps. Did you go to college or take vocational training during that time? Once the underwriter has approved all documentation and determines that the loan is a good fit for you, a clear to close, CTC, will be issued, allowing the loan to move into the final stage of the process, closing on your new home.