When you apply for a mortgage, your lender will look at your entire financial picture to determine whether or not you qualify. This vetting includes a review of your credit history, employment, the funds you have availabl to purchase a home, and more. These factors will ultimately determine the type of loan and interest rate you qualify for. But just what does a lender look for on your credit report? Knowing that somebody is going through your records with a fine-toothed comb can be a little intimidating, but we’re here to give you a heads up on what a lender is looking for when they review your credit report.

Credit History

The most important factor lenders look at when analyzing your credit report is your credit history. This shows how well you’ve paid your bills, like credit cards, student loans, and auto loans. If you take care of your financial obligations on time and don’t use all the credit available to you, lenders will look more favorably on your application as it’s a sign that you can responsibly handle your credit.

Lenders will also check to see if you have any recent significant derogatory events on your credit report. A significant derogatory event is any single event that may give the lender cause to consider you a high risk for future default. Examples of significant derogatory events include bankruptcies, foreclosures, deeds-in-lieu of foreclosure, pre-foreclosure sales, and short sales. If you have any of these events on your credit report, you’ll probably have to wait a while before you can apply for a new mortgage. These waiting periods are usually between two and seven years, depending on the circumstances.

Debt-to-income Ratio

Also found on your credit report, your debt-to-income ratio is one of the most important things that lenders pay attention to when considering you for a mortgage. Your debt-to-income ratio (DTI) tells them whether your income can cover your mortgage payments and other debts (such as credit cards, student loans, auto loans, and other obligations). Your DTI puts a quantitative value on your ability to pay back your loan. The higher your DTI, the more likely it is that you will not qualify for the mortgage amount you applied for. Think of it this way: if your total income cannot cover your monthly expenses and leave you with some spending money for things like groceries, gas, and entertainment, then it could be difficult to make your monthly mortgage payments. Lenders look at your DTI in two ways:

Housing Ratio: This is your gross monthly income divided by your proposed monthly housing expenses (your mortgage payment, including principal, interest, taxes, insurance, and homeowners association dues, if applicable). The limit for this ratio is typically around 26% to 28%.

Total Debt Ratio: Your gross monthly income divided by the sum of all your recurring debt payments (such as student loans, auto loans, credit card payments, etc.) including your proposed housing expenses. This limit is typically around 43%.

One of the most important things that lenders pay attention to when considering you for a mortgage is your debt-to-income ratio.

Payment History

At the end of the day, your lender is lending you money with the intention of getting paid back. That being said, they want to see that you have a track record of not only making payments, but making them on time. A major determining factor in your credit score is payment history, which accounts for about 35% of the total score. Late or missed payments, especially on your mortgage, or a past bankruptcy are all considered red flags to lenders—because nobody wants to loan money to someone who won’t pay them back. That doesn’t mean that a few minor late payments will stop a lender from giving you a loan, but you may be either approved for a smaller loan or your interest rate may be higher than that of someone who has never missed a payment.

New Accounts

It’s always good to have an established credit history. However, opening a bunch of new credit card accounts in a short period of time may cause your credit score to drop and the lender to question if you are having trouble managing your finances. It may be tempting to put new appliances and furniture on new credit cards, but be patient. You’ll have plenty of time to buy things for your new house after you close.

Stable Employment

Another important indication of your ability to repay is a record of stable employment, which can also be found on your credit report. Lenders will look at how long you have held your current job and how long you have worked in your current profession. Having a stable job lets your lender know that you have a dependable source of income to repay your mortgage. Moving jobs frequently may affect your ability to be approved for a mortgage, especially if those job changes are not consistent for your industry.

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Lesson 1: An introduction to underwriting

Underwriting is the process of a lender verifying your income, assets, credit history, debt, and property details to determine if you are approved for your loan. This may not be the most exciting part of the mortgage process, so underwriting typically happens behind the scenes. The time it takes an underwriter to review can vary depending on the complexity of your financial history, how soon you submit the required documentation, and mortgage industry volumes.

Lesson 2: What underwriters do

The underwriting process typically starts after your application is submitted and your loan is locked. While your future home is getting appraised, underwriters take a close look at your financial background and determine how much of a risk your lender will be taking on if they choose to give you a loan. This might sound a little scary, but the process helps both sides. Ensuring borrowers can pay back their loans protects the borrowers from taking on too much debt and the lender from taking on unnecessary risks. When evaluating your financial situation, underwriters:

• Check your credit history
• Order an appraisal of your potential home
• Verify your income and employment history
• Check your debt-to-income ratio (DTI)
• Comb through your financials to ensure that the down payment you’ve agreed to is manageable

While your loan is going through underwriting, it’s a good idea to stay in contact with your lender. And remember, don’t make any major decisions or purchases (like a new car or furniture) that will impact your financial picture. Any significant change in your finances means you’ll essentially have to start your application all over with the latest numbers.

Lesson 3: After the underwriter’s decision

The underwriting process concludes with one of three outcomes: final approval, conditional approval, and denial. Obviously, approval is the best outcome here. When your loan has final approval, you’re finished with processing and free to move on to closing. That means you’re one step closer to completing the loan process. Conditional approval happens when you’ve submitted all of the required documentation and it looks good for the most part, but the underwriter wants you to take care of a few more things before final approval. You may need to submit additional documents such as a letter of explanation, gift letters, or tax documentation to clear some things up for the underwriter. If a conditional approval is issued, there probably aren’t any major red flags standing in the way of your final approval. Denial isn’t the outcome we want to see, but it doesn’t mean you can never be a homeowner. Mortgage loans can be denied for a number of reasons, but a few of the most common are low appraisals, lack of down payment and closing funds, a high DTI, and low credit scores. All of which can be fixed over time! Talk with your loan originator to discuss your options. If you get denied, consider it a minor setback and take the initiative to save more money for a down payment and fix your credit. You can also look into home loan assistance if low income is what’s holding you back.

Underwriting lessons in review

What’s a lesson without a recap? Here are the key takeaways to remember about underwriting:

• Underwriting is the process of your lender verifying your financial situation and double-checking to make sure your mortgage can be approved.
• Underwriters don’t write, but they do check your income, assets, credit history, debt, property details, and loan amount to evaluate the risk of giving you a mortgage.
• The time it takes to underwrite your loan can vary, but being prepared and having your paperwork submitted as quickly as possible can go a long way in speeding up the process.
• The underwriting process can result in your mortgage being approved, conditionally approved, or denied.

If this was an actual class, we’d give you an A. And even though it’s not an actual class, our office hours are 24/7 for questions you may have about underwriting or any other part of the home loan process.

There’s no writing in underwriting. The more you know.

The post Underwriting 101: The Basics of Mortgage Underwriting appeared first on Cardinal Financial.