Yes, underwriting is the scary part of your mortgage application. Underwriters are often seen as the fault-finders who are out to get you. Or most borrowers think so.
If you really think about it, underwriters are just protecting their own business by employing a way to prevent loss of investment. Properly defining risk and transacting only with people who can give them a better deal is SOP in every other business transaction.
Properly understanding what underwriters actually do and what they look for in your application can help you prepare better and lessen your anxiety about being turned down.
So what are the most important things that underwriters examine?
Your credit score and your credit data tells so much about the type of borrower that you are. A good credit score (FICO 640 and above) is an indicator of good financial health.
Conventional lenders are wary of approving loans with FICO scores lower than 620, although it is not impossible to find mortgage programs that would still approve loans for borrowers with damaged credit.
To build good credit, practice good credit habits such as paying your credit card dues on time, not spending over the limit of your cards, paying balances in full instead of letting them revolve and accrue interest, etc.
Before you apply, request for a credit report from the three credit bureaus. Examine it, and dispute any erroneous claim as they can seriously damage your chances of getting the needed loan.
Lenders will also look at other credit factors such as bankruptcy reports, foreclosures, and judgments, among others. You must not have any delinquent reports in the past two years, and a foreclosure in the last three to five years (time factor depends on the loan type you are getting).
Your Repayment Capacity
You must be able to prove or show evidence that you can pay back the money that you owe. Lenders will ask you to hand over:
- a verification of employment
- handwritten income documentation
- tax returns
- bank statements
Now this is where most borrowers fail, especially the self-employed ones or those who receive commission-based salary where it is hard to show a stable income source. This is also a problem for borrowers who have exceedingly high income for their position.
If you are stuck in one of these situations, the best thing you can do is to try to provide documents that would explain your income to the lender. You can also write a letter of explanation clarifying income issues, gaps in employment, or any history deficit.
It also boils down to the lenders you work with. If you are in a special case such as this, you will require more work and attention. If your lender does not demonstrate the willingness to work with you personally regarding your situation, then that is a signal to turn to others for help. There are specialty lenders willing to work with such cases (e.g. stated-income loan lenders).
This pertains to the property that the loan is made against. In the case of a mortgage, it is the home that you are getting financing for. How much is the house worth in the market matters, as well as how much down payment you are willing to give. Your equity is also taken into account.
The thing is, underwriting is not really as scary if you are well-prepared. The secret to successful financing is in getting things right from the very beginning. Work out your status and see if there are things you can do to improve it. Then find the right people to get your financing process rolling.