Understanding How Underwriters Calculate What You Can Borrow for a Home Loan

April 17, 2020
Integrity First Lending

Before you can get a loan for your mortgage, your request for the loan has to go through underwriting. The underwriting process is fairly straightforward—your lender takes the information you provide about your income, assets, property, and debts to determine whether they should give you a loan. You won’t be involved in the process except to provide any necessary information to your lender.

Underwriters play a crucial role in determining how much risk you present as a borrower.

What Underwriters Look for in Home Loan Applications

During the process, an underwriter is looking for two main things: how much risk they believe you present as a borrower, and whether you will be able to afford the loan. In the underwriting process they review:

  • Your credit history, including your credit score from a credit report
  • On-time payment history for other loans, including mortgages, auto loans, student loans, rent, and revolving credit lines
  • Bankruptcies or other negative financial events in your past
  • Credit balances on your revolving credit lines (overuse of credit could be a red flag that you are not in a good financial position)

Once they review this information, the next step is to order an appraisal of the property you are planning to purchase. This is done by a third-party appraiser who looks at the home you’re planning to buy and compares it to home values in the area to ensure that it is worth the amount of the loan you’re requesting.

Next they look at your current income and employment status. You will need to provide proof (usually in the form of pay stubs) of your total monthly income and how long you have been employed in your current position. If it’s a new job, they may request information about your previous employment and require proof of income from a past employer in addition to your current pay stubs.

An underwriter will also check your debt-to-income ratio, which is a term for how much money you are paying each monthly on debt payments as a percentage of your income. If you have a lot of debt and are paying a lot of your income toward debt each month, the underwriter may decide that you can’t borrow as much because their job is to make sure you will have enough cash flow to pay your mortgage.

Finally, the underwriter will look at your current bank accounts, including checking and savings, to make sure you have enough cash for things like a down payment. They are also looking for any irregularities in your accounts, so if you recently made a large deposit, be prepared to explain and provide documentation about where it came from in case the underwriter asks. For example, if you made a deposit of $30,000 into your savings account after selling your last home, you may be asked to provide documents from the closing.

The underwriting process is an essential part of a home loan. Understanding what’s involved and what you need to provide can help you move through the process quickly to get approved for your loan. Contact Integrity First Lending today for information about mortgage loans.

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