Mortgage Planning Tips

Once you decide to apply for a home loan, your application will be submitted and sent along to a loan underwriter, who will determine if you’re a sound borrower. The underwriter can approve, suspend, or decline your loan application; if the loan is suspended, you’ll need to supply additional information or documentation to move it to approved status.

So how do underwriters determine the outcome of your mortgage application anyways? Well, there are the three Cs of underwriting, otherwise known as credit, capacity, and collateral.

Credit has to do with your credit history, including past foreclosures, bankruptcies, judgments, and basically measures your willingness to pay your debts. These items will be reflected in your three-digit FICO, which can actually eliminate you without any further underwriting necessary if you fall below a certain threshold.

Capacity deals with a borrower’s actual ability to repay a loan, using things like debt-to-income ratio, salary, cash reserves, loan product and more. This covers whether the loan is interest-only, an adjustable-rate mortgage or fixed, cash-out refinance or simply rate and term. The underwriter wants to know that you can repay the mortgage you’re applying for before granting approval.

Finally, collateral deals with the borrower’s down payment, property type, and property use, as the lender will be stuck with the home if the borrower fails to make timely payments.

Now it’s important to understand that the three C’s are not independent of one another. All three must be considered simultaneously to understand the level of layered risk that could be present in your application. For example, if the borrower has a less-than-stellar credit score, limited asset reserves, and a minimal down payment, the risk layering could be deemed excessive, leading to denial.

This is the underwriter’s discretion, and can certainly be subjective based on other factors like job type, how long the borrower has been in the job, why the credit score is less than perfect, and so on. The underwriter must decide, based on all the criteria, if the borrower is an acceptable risk for the lender, and if the end product can be resold without difficulty to investors.

In the current market, underwriting guidelines have tightened dramatically making it a priority for you to get pre-approved in advance and work with a true professional such as a Certified Mortgage Planner to help you structure your loan so you will not have an underwriter suspend or decline your loan application.