Home loans can be risky for lenders. Before the credit crisis of 2008, lenders would often only loosely review a mortgage customer's credit, income and employment. This led to an epic meltdown of the U.S. financial system. To prevent another disaster, all lenders must understand that the role of an underwriter is critical--she is responsible for not only verifying a customer's ability to repay the loan, but also offering counsel to the loan officer about potential credit problems. There are some general criteria that most underwriters use when reviewing applications.
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The most important factor in determining eligibility is income. Most underwriters use two ratios when calculating income: the debt-to-income ratio (DIR) and the disposable income (DI) ratio. To calculate the DIR, underwriters divide the monthly credit-reportable bills by the monthly gross income. A DIR of 38 per cent or less is best. To calculate DI, underwriters subtract monthly bills from the net monthly income. A DI above £650 usually will qualify a borrower.
Credit is also quite important for underwriters. Most underwriters pull a tri-bureau report on all mortgage applicants. This is often a proprietary report that merges the three reports from the three top credit bureaus--TransUnion, Experian and Equifax. The tri-bureau report will offer an average FICO score (the credit score) and show the payment histories on all open and closed accounts. Underwriters must spend time reviewing all reports--especially secured accounts like old mortgages and car loans.
Lenders are not appraisers, but they do know how to read appraisal reports. While the appraiser is the expert, the underwriter has the final say on whether a report is accurate and fair. The underwriter must take an especially close look at the comparable properties on the report. This is where market value is often determined. If the comparable properties are unfair (e.g., less square footage, fewer rooms and different neighbourhoods than the property in question), the underwriter may ask for another appraisal.
An underwriter must look at a borrower's overall history. This includes not just credit but also employment and residence. A borrower who has lived in a home for 10 or more years and who has held the same job for a similar period of time will often be given more leeway if they have other problems on the application (like credit blemishes). These demographic factors are a judgement call for the underwriter.
When reviewing the credit report, an underwriter must look closely at any previous mortgage history. An underwriter is determining whether or not an applicant is a solid mortgage risk. If the prospective borrower has a history of mortgage defaults, this will be a huge red flag. It may even disqualify the borrower. Most underwriters ask for an explanation for any delinquencies (especially mortgage delinquencies).
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