Underwriting is the process of having a third party accept funds to absorb the risk of loss in value of merchandise. Mortgage underwriting is the calculation of the amount of risk of loss or damage to the asset. When a bank is issuing a mortgage, the asset or property is subject to an evaluation to determine the value of the asset.
In mortgage underwriting, the financial analyst's job is to review the publicly available information and make a decision on the risk to the bank and the creditworthiness of the borrower. A credit analysis of the purchaser is completed is used in the process.
There are several calculations completed by the department to evaluate the level of risk to the bank. The debt-service ratio provides a comparison of the borrower's income to his or her monthly debt obligations. A value between 0 and 35% is an acceptable value for most financial institutions. Any greater than this is considered high risk, based on the statistical analysis.
The mortgage qualification amount is also a calculation. The total value of the property should not exceed three times the borrower's gross annual salary, and requests over this amount mean that a greater risk to the bank. These values are based on prior analysis and are consistent across most financial institutions.
Mortgage underwriting can also refer to commercial property and development companies planning to build new real estate. A developer finances the purchase of land or property with a mortgage. A proposal must be submitted to the bank so that the underwriting department can review the details and evaluate the probability of success, the level of risk for the financial institution, and what can be done to mitigate those risks.
If a person applies for a mortgage and is rejected, is it almost always due to the decisions made in the mortgage underwriting department. It is the responsibility of the underwriters to review each mortgage application and ensure that all the required documentation is provided and check the ratios and scores calculated by the loan evaluation software.
Every financial institution has a computer software program that analyzes the data related to a request for financing. During the underwriting process, the annual income, total liabilities, liquid assets, secured and unsecured debt, and the value of the house are reviewed. The credit score is added to the process, along with the debt-service ratio to arrive at a reasonably accurate evaluation of the risk to the financial institution.
The importance of the credit score cannot be overemphasized. This number provides the financial institution with insight into the borrower's payment history and money management skills. People who are thinking about getting a mortgage should request their credit report and score before starting the process.
Someone who is planning on applying for a mortgage should not apply for any new credit a minimum of six months before. The number of credit inquiries tells lenders if the person is actively seeking credit to manage his or her financial obligations and living expenses. Potential borrowers should be prepared to show the last three months of bank statements, with no insufficient funds bank charges. Those who improve their credit scores lower their risk to the bank.