The entire financial condition of the applicant is reviewed during the mortgage loan underwriting process. The applicant provides the lender with the documents that support his credibility, and the underwriter, on behalf of the lender, analyzes the prospect of the applicant in being a suitable risk. The process may take any time duration, ranging between a few hours to a few weeks.
Though the processes like electronic underwriting and credit scoring are available to ease the underwriting process, the final decision lies in the hands of the underwriter. All sorts of information related to the borrower’s financial situation is analyzed. The prime factors that decide his credibility are his sources of income, monthly housing expenditures, monthly debt obligations, and the funds that he will be using to close his loan.
The borrower’s source of income is the first and the most important deciding factor that determines his credibility. There may be one or more than one sources of income, depending on whether a single applicant has filed for a loan or he has other co-applicants along with him. It is analyzed if the income source will remain stable during the entire period of loan closing. The income source may be a job, individual business, or group business. A job change or a major change in the business methodology in case of self-employed individuals during this process can further complicate the procedure.
The next prime factors that are studied by the underwriter are the monthly housing expenses and monthly debt obligations of the applicant. He generally reviews the monthly taxes and fees that the borrower has to pay. A ratio is typically calculated to check out what percentage of the borrower’s monthly income is spent in his housing expenses. The borrower’s income-to-debt ratio is also calculated. Any debts that may continue for more than 10 months are analyzed, and the borrower’s potential to close the debt is also analyzed.
Even if the analysis of the current financial situation of the borrower goes on smoothly, it is not necessary that a loan will be granted. The borrower’s records related to his debt payments and bank profile are also studied in detail. It is verified if the borrower has ever faced a foreclosure or any such situation, during which he was unable to pay his taxes. It is also checked if there were any major breaks in his employment in the past.
Depending on the type of loan that the borrower has applied for, the underwriter may demand some other additional documents, too. During the underwriting process, it is also verified that the funds the borrower will be using to make his down payment are legal. The funds should have been accumulating in his account for a certain period of time, and the underwriter also takes into notice if there has been any major shifting of funds from the account. Shifting of funds from this account for even a very small duration of time would immediately pop up as a red flag. The type of funds that the borrower may use for closing the loan are analyzed in detail. If the borrower intends to make a down payment through stocks, then the current value of the shares and the past performance of these stocks are also studied in detail. Some borrowers often intend to make initial down payment through ‘gifts’ from their relatives. Though it is typically accepted by the lenders, the percentage of the down payment that can be made through gifts is normally limited. The underwriter also verifies if there are any financial obligations of the borrower against the funds that he has received as gifts from his relatives.
His final decision may take a considerable amount of time. If the borrower shows a very clear picture of his credibility, then the documentation process related to issuing him the loan is started immediately. In certain cases, the applicant is accepted for it, but he is asked to submit certain documents, without which his documentation process will not start. In case it is rejected, he is intimated within three days from the final decision.