What Is Underwriting for a Home Loan?

What is Mortgage Underwriting?

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Loan origination for mortgages is a slightly more complex process that involves a step known as underwriting. Mortgage underwriting is a process in which the lender determines the risk of offering a home loan to a borrower, based on certain parameters. 

It is up to an underwriter to make the final decision on whether or not to approve a mortgage. Because of this, underwriters have many guidelines set by banks that must be taken into consideration as well as access to personal financial details of each borrower. Here are the three C’s that underwriters must consider when evaluating risk: credit, capacity, and collateral.

How Underwriters Determine Risk

The three C’s of underwriting help to determine whether a borrower will be approved for a loan or not. But what are the three C’s, and what exactly are underwriters scrutinizing?

  • Credit: Underwriters can use a borrower’s credit score and overall credit report to see more or less how that borrower has handled their debts. It’s a common theme that a borrower’s credit correlates to their likelihood of defaulting on a mortgage.

  • Capacity: The term “capacity” is basically covering the borrower’s ability to make the monthly payments on the loan. To determine capacity, the underwriter looks at employment history and status, income, assets, and debts. Determining the stability of the borrower’s income (including debt-to-income ratio or “DTI”) is key here, as many loans default as a result of a loss of employment.

  • Collateral: The final thing lenders look at is the property being used as collateral for the home loan. Several factors come into play such as home value, whether the property will be owner-occupied or used as an investment, and even property type. Underwriters classify property types by risk and have a system of figuring out what class of risk is acceptable for any given borrower.

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