If you are most probably purchasing a new home, then there are chances that you take out a mortgage in order to finance the purchase. The entire procedure that most lenders use to find your creditworthiness is called loan underwriting process. In this piece of information, we have explained everything you need to know about the procedure.

Loan underwriting procedure explained

The process of loan underwriting is where the lender will find out the risk of lending money to you. Whether it is the lender or someone from the bank, everyone will find out if you will be able to pay the loan back to them in the given time period.  Basically, the decision is taken through the underwriting procedure only.

Before the loan underwriting process begins, a lender will ask the buyer to provide all the crucial documents. With these documents the lender will verify your identification, take into consideration your credit score, and examine your financial situation. A number of lenders will closely follow the below mentioned underwriting guidelines from Fannie Mae and Freddie Mac.

Automated underwriting vs Manual Underwriting

A mortgage underwriter expert can easily examine your loan application. The same can be done with a software program famously known as automated underwriting. This procedure is basically completed in no time. However, the entire procedure is performed by a computer, it has some limitations which is why you might think twice before opting for this method. During such situations, it is way too easy to qualify for the loan using manual underwriting. There are times when lenders use a combination of both manual and automated underwriting in order to avoid the possible risks. The risks are found out by using a risk management system.

What does the underwriter do?

It is the responsibility of an underwriter to examine the potential risks. This means the risks related to the borrower not paying the loan amount on time. To move further with the procedure, an underwriter will take into consideration the below mentioned factors:

• The property you want to purchase
• The credit history
• The credit score

After considering all the above mentioned factors, the underwriter will examine the documents and make a final call. Below is an example from Fannie Mae’s underwriting guidelines. Let’s assume that a lender needs the below mentioned in order to get his/her loan application approved:

• Credit score of 680 or more
• LTV ratio of 95 percent
• DTI ratio of 36 percent

By any chance if the borrower falls short in any of the areas mentioned above, the loan application still can be approved. However, the below factors will be taken into account:

• Credit score
• Amortization schedule
• LTV ratio
• DTI ratio
• The property you want to purchase

By any chance if you have a higher DTI, your loan application will get approved only if you have a strong credit score. If your LTV ratio is less than 95 percent, you will get a loan but with a low credit score.

This is all that happens during a loan underwriting procedure. The best loan underwriting system is made into use and a final call is taken by the lender itself.