Looking for a home loan? Your loan application goes through a process before it is approved or rejected. You might want to learn how it all works. In this article, you will learn about underwriting, one of the most important stages in loan origination.
Banks and other lenders use a loan origination system to automate the entire loan origination process. Automating the loan origination process using a loan origination system saves the time of both the applicant and the lender.
Mortgage Underwriting
The underwriting process assesses the loan risk. A bank, mortgage lender or credit union needs to determine whether you can pay back the borrowed amount or not. In case the lender determines that it is a risky loan, you may have to pay a high-interest rate or your loan application will be rejected. If the loan is not risky, your loan application will be moved to the next stage.
After receiving your documents, the underwriter verifies the borrower’s identification and reviews the credit report. This also includes the assessment of your financial situation (cash reserves, income, financial assets, equity investment, and other factors)
The loan origination system or an underwriter will evaluate factors to assess the overall risk. The following table illustrates those factors:
| Credit score | To see if you meet the minimum requirement |
| Credit report | To check loans and repayment history |
| Property appraisal | To check for adequate collateral |
The entire assessment is documented.
The following table illustrates the Fannie Mae’s guidelines:
| Maximum loan-to-value ratio | 95% |
| Credit score | 680 or higher |
| Maximum debt-to-income ratio | 36% |
In case the applicant does not meet any of these requirements, still the loan may be approved.
This depends on the strength of the following factors:
- LTV ratio
- DTI ratio
- Credit score
- Amortization schedule
- Financial reserves
- Type of property
- Number of units
- Whether the borrower will occupy the property or not
With a 40% debt to income ratio, if you have a better credit score, the lender may approve your loan. Similarly, if the loan to value ratio is better than 75% and credit score is 620, the lender may approve your loan.
Getting your Loan Application Approved
When you submit your loan application, make sure that the required financial documentation including all the forms, tax returns, bank payments and pay stubs are provided. The lender may call you to ask questions and request additional information. Provide the requested information without any delay. Your mortgage gets through the following steps:
Get Prequalified
First of all, you need to prequalify. The bank reviews your debts, income and credit file. This will help you determine the kind of mortgage that addresses your requirements.
Documents and Income Verification
Provide the requested financial documents the lender needs for your income verification. After the loan processor confirms all the information, you receive a pre-approval letter.
Appraisal
The next step is property appraisal to find the property’s value.
Title Search and Insurance
The lender needs to make sure that the property does not have any legal claims. This is where a title search company helps. This step also requires title insurance.
The Underwriting Decision
The lender may approve, deny, suspend or approve your loan application with conditions.