The 3 C’s of mortgage underwriting

Purchasing a house can be pretty exciting and pretty confusing — all at the same time. And it doesn't matter if you're a first time home buyer or if this is your second or third time you're taking the plunge into homeownership. That's because the process of applying for a home loan, providing the supporting documentation and waiting for a thumbs up from a mortgage company has typically been one that is lengthy and cumbersome.

The part of the process that is most unclear to many borrowers — the stuff that goes on behind the curtain, so to speak — is the underwriting process. That's because the typical home loan applicant doesn't know or understand what the underwriter is looking for as they are deciding on whether or not you get your dream home. 

What is mortgage underwriting?

Underwriting is when a member of the mortgage team — the underwriter — analyzes your personal financial information to evaluate whether or not it satisfies the mortgage lender's criteria and matches the requirements of the type of loan you're applying for. Specifically, you will be asked to supply:

• W-2s
• Tax returns
• Recent pay stubs
• Verification of employment
• Copy of government-issued ID
• Permission to pull credit

After reviewing these documents, the underwriter determines how risky it is to loan you the money you need. In reality, it's an educated guess based on your credit history, your assets and your income of how likely you are to make mortgage payments on time and eventually repay the loan in full. 

Unfortunately, many mortgage companies handle the underwriting process after you've already found the house you want to buy, have put in a bid and then apply for a mortgage. If you take too long to supply the necessary information, or if the underwriter takes too long in making a call on your creditworthiness, you could lose out on your dream house.

Movement Mortgage does things a little bit differently. We underwrite every loan at the beginning of the loan process. This gives you a significant advantage in a crowded market as sellers are more likely to accept a bid that's already underwritten and pre-approved by a mortgage lender. It's more of a sure thing. Early underwriting also helps prevent any last-minute rushing. Our “reverse” approach is unique — we assess the loan and aim to have it released from underwriting within 6 hours* — allowing you to bypass an industry full of stressful and slow lenders. 

But what, exactly, is the underwriter doing when they decide whether or not to approve you for a loan? Let's find out. 

The Three C's

After the above documents (and possibly a few others) are gathered, an underwriter gets down to business. They evaluate credit and payment history, income and assets available for a down payment and categorize their findings as the Three C's: Capacity, Credit and Collateral.

Capacity: 

Your underwriter will look at your ability to repay a loan by comparing your monthly gross income against your total monthly recurring debts. That will result in a numerical figure called the debt-to-income (DTI) ratio. They will also take into account assets like your bank statements, 401(k) and IRA accounts.

Here, the underwriter is trying to ensure that you have enough money to cover future mortgage payments on top of current obligations. Additionally, they want to check if you have enough liquid cash available to make a down payment. If not, you may be required to pay monthly private mortgage insurance (PMI) on top of principle and interest. 

Credit:

Underwriters look at a combined credit report from the three national credit reporting agencies — Equifax, Experian and Trans-Union — to see how you've handled repaying debt in the past. During this stage, they'll get a feel for how much credit you've taken on, what the terms were and whether your past credit history raises any red flags about how you'll do paying back the loan. 

All this information will help the underwriter determine which type of loan is best for your particular situation, what your interest rate should be or if you are denied, why. If you haven't learned by now, having a good credit history is probably the most critical factor in getting good mortgage terms. 

Collateral: 

Here, your lender is looking to hedge their bets just in case you default on the loan. To do this, they order a home appraisal to verify the home's value, not just the amount of the loan, and then determine a loan-to-value ratio (LTV). 

If you're looking to buy a new home, the LTV ratio is calculated by dividing the amount by either the purchase price or the appraised value, whichever is lower. LTVs also come into play when you're thinking of refinancing a mortgage or if you plan to borrow against the equity you're building in your home. Note that not all LTVs are the same: different types of mortgages have different LTV requirements. 

Upfront underwriting in 6 hrs* when you apply online

Ask friends and family how long it took for them to get their underwriting approval. Some lenders can take anywhere from three days to a week to get back to you. Sometimes more. 

At Movement, our goal is to have underwriting completed upfront in as little as six hours* from receiving your application. Granted, this timeline can be impacted by a few things: how quickly you turn in all the documentation, holidays and the time of day you submit your application.

If you're a prospective homebuyer with a question about underwriting approvals or other parts of the mortgage process, reach out to one of our local loan officers to discuss your options. Or, if you're ready to get started now, you can always apply online!

*While it is Movement Mortgage's goal to provide underwriting results within six hours of receiving an application, process loans in seven days, and close in one day, extenuating circumstances may cause delays outside of this window.