Deciding factors for underwriters for approving or denying home loans

24th May, 2021

Homeownership is an essential part of your adult life, and you may want to buy your dream home as soon as you come across one. But it is not easy to finance your home. The underwriters look into multiple aspects before approving or disapproving your loan. But, what are the factors that lead them to decide the home mortgage rates or approving the loan? Let us take a quick look at these factors.

1. Credit score

The first and most vital factor determining your eligibility for a loan and your home mortgage rates is your credit score (or history). The underwriter will gauge your credit report to know whether you have made all your payments on time. This will include all the credit payments and loans. Of course, you may get home mortgages for bad credit scores, but the interest rate will be higher. Your credit report will help them predict your ability to repay the amount they loan you.

2. Debt-to-income ratio
The next factor employed to decide your eligibility for a loan is the debt-to-income (DTI) ratio. This is the proportion of the debt you owe against your income. The debt here will include the mortgage payment, which will also be added to your monthly due payments.

Suppose your car loan, housing cost, and the education loan due make a cumulative total of USD 1500 per month, and your per month income is USD 5000, your DTI ratio will be 30%, that is, debt (USD 1500)/income (USD 5000).

In a typical situation, your DTI is capped at 40% to avail of a conventional mortgage. There will be exceptions, but similar to home mortgages for a bad credit score, even when your DTI is high, your terms of the loan can be stricter, or you might not qualify for a loan at all. If you avail of a small lender loan, the terms may be severe, and they usually cap the ratio to 36%.

3. Employment risk
Different professions have varied risks annexed to them. If you look at it from the general perspective, a banker’s job will be considered relatively safer than a freelancer’s job. On the other hand, a government employee’s job is safer than a firefighter’s. If the risk in your career is less, you can get better loan terms — why? It offers the lender a sense of security that you can make repayments easily. Thus, your employment also plays a vital role in determining your loan qualification status.

4. Collateral
Employing the home’s current market value, the underwriter will ensure that it serves as adequate collateral for the mortgage. This assures the lender that if you fail to make the payments, they can recover the unpaid balances. The underwriter will use a mortgage calculator to account for the appraisal in the home’s worth valuation.

When you get the loan, always use the mortgage calculator to know the actual monthly payments you will be required to make. This way, you can prepare your budget accordingly and never miss a payment.