Underwriting – Mortgage lending cycle

Underwriting is very crucial and integral part of whole mortgage lending process. In this phase the documents are verified in a detailed manner and review the process before going to submit the final report. Underwriters review the property and credit report of an applicant to evaluate this process.
Underwriters analyze the process in such a way so that they can find out how risk involved in the loan package and they need to follow certain guidelines prepared and followed as per the Fannie Mae and Freddie Mac, because they are the quality and ultimate investors. Fannie Mae and Freddie Mac provided certain software’s for the loan approvals and underwriters need to check whether the loan qualifies as per the requirements or not. If any document is lack of required information that needs to be informed to the applicant so that he/she can supply the same for the completion of the document process.

In addition, underwriters need to analyze the risk factors of a loan package and it includes four C’s to be verified. Following are the 4C’s need to be verified

Capacity: The applicant should have a regular incoming source, no matter daily, weekly or annually to meet the regular house holding expenses. His stability and ability needs to be checked in the process whether he is capable enough to repay the mortgage loan. There are different qualification ratios available in the mortgage market to find out the capacity of an applicant. Secondary market agencies and government agencies never follow the same one. Each one follows different criteria to evaluate this ratio. But the underwriters should follow the one which is accepted by the Fannie Mae and Freddie Mac.

Capital: The applicant should have some liquid assets with him for the expenses that are involved to complete the loan process. Closing costs include so many expenses the applicant should pay before the closing of loan process and an applicant needs to pay some down payment. Applicant’s assets have to be verified to analyze the capital and certain verifications have to be done such as verification of deposits, verification on stocks and bonds, verification on sale of any real estate, life insurance policies and gifts etc..

Character: Some debtors are capable enough to repay the loan amount but they don’t pay in time. Underwriters review the credit report to evaluate the willingness of repay the loan amount. They review the other documents and information supplied in the application and submitted by the processor for the completeness of the loan process. Credit history shows the clear picture of repayment of past debts and applicant intention towards repayment of mortgage debt.

Collateral: Loan-to-value (LTV) ratio is necessary to evaluate the appraisal value of the property. Appraisal value is the correct value of the property. This value has to be determined after taking the consideration of other similar properties around the area. So the appraisal value is important to estimate the risk involved in the loan package.

Approving the Loan: After studying all 4C’s, underwriter needs to produce an approval or decline letter. After underwriter approves it, the mortgage banker or lender issues a commitment letter to the borrower and this is the final step of mortgage loan process before they close it legally.