Purchasing a house can be pretty exciting and pretty confusing — all at the same time. And it doesn’t matter if you’re a first time home buyer or if this is your second or third time you’re taking the plunge into homeownership. That’s because the process of applying for a home loan, providing the supporting documentation and waiting for a thumbs up from a mortgage company has typically been one that is lengthy and cumbersome.
The part of the process that is most unclear to many borrowers — the stuff that goes on behind the curtain, so to speak — is the underwriting process. That’s because the typical home loan applicant doesn’t know or understand what the underwriter is looking for as they are deciding on whether or not you get your dream home.
What is mortgage underwriting?
Underwriting is when a member of the mortgage team — the underwriter — analyzes your personal financial information to evaluate whether or not it satisfies the mortgage lender’s criteria and matches the requirements of the type of loan you’re applying for. Specifically, you will be asked to supply:
- W-2s
- Tax returns
- Recent pay stubs
- Verification of employment
- Copy of government-issued ID
- Permission to pull credit
After reviewing these documents, the underwriter determines how risky it is to loan you the money you need. In reality, it’s an educated guess based on your credit history, your assets and your income of how likely you are to make mortgage payments on time and eventually repay the loan in full.
Unfortunately, many mortgage companies handle the underwriting process after you’ve already found the house you want to buy, have put in a bid and then apply for a mortgage. If you take too long to supply the necessary information, or if the underwriter takes too long in making a call on your creditworthiness, you could lose out on your dream house.
Movement Mortgage does things a little bit differently. We underwrite every loan at the beginning of the loan process. This gives you a significant advantage in a crowded market as sellers are more likely to accept a bid that’s already underwritten and pre-approved by a mortgage lender. It’s more of a sure thing. Early underwriting also helps prevent any last-minute rushing. Our “reverse” approach is unique — we assess the loan and aim to have it released from underwriting within 6 hours* — allowing you to bypass an industry full of stressful and slow lenders.
But what, exactly, is the underwriter doing when they decide whether or not to approve you for a loan? Let’s find out.
The Three C’s
After the above documents (and possibly a few others) are gathered, an underwriter gets down to business. They evaluate credit and payment history, income and assets available for a down payment and categorize their findings as the Three C’s: Capacity, Credit and Collateral.
Capacity:
Your underwriter will look at your ability to repay a loan by comparing your monthly gross income against your total monthly recurring debts. That will result in a numerical figure called the debt-to-income (DTI) ratio. They will also take into account assets like your bank statements, 401(k) and IRA accounts.
Here, the underwriter is trying to ensure that you have enough money to cover future mortgage payments on top of current obligations. Additionally, they want to check if you have enough liquid cash available to make a down payment. If not, you may be required to pay monthly private mortgage insurance (PMI) on top of principle and interest.
Credit:
Underwriters look at a combined credit report from the three national credit reporting agencies — Equifax, Experian and Trans-Union — to see how you’ve handled repaying debt in the past. During this stage, they’ll get a feel for how much credit you’ve taken on, what the terms were and whether your past credit history raises any red flags about how you’ll do paying back the loan.
All this information will help the underwriter determine which type of loan is best for your particular situation, what your interest rate should be or if you are denied, why. If you haven’t learned by now, having a good credit history is probably the most critical factor in getting good mortgage terms.
Collateral:
Here, your lender is looking to hedge their bets just in case you default on the loan. To do this, they order a home appraisal to verify the home’s value, not just the amount of the loan, and then determine a loan-to-value ratio (LTV).
If you’re looking to buy a new home, the LTV ratio is calculated by dividing the amount by either the purchase price or the appraised value, whichever is lower. LTVs also come into play when you’re thinking of refinancing a mortgage or if you plan to borrow against the equity you’re building in your home. Note that not all LTVs are the same: different types of mortgages have different LTV requirements.
Upfront underwriting in 6 hrs* when you apply online
Ask friends and family how long it took for them to get their underwriting approval. Some lenders can take anywhere from three days to a week to get back to you. Sometimes more.
At Movement, our goal is to have underwriting completed upfront in as little as six hours* from receiving your application. Granted, this timeline can be impacted by a few things: how quickly you turn in all the documentation, holidays and the time of day you submit your application.
If you’re a prospective homebuyer with a question about underwriting approvals or other parts of the mortgage process, reach out to one of our local loan officers to discuss your options. Or, if you’re ready to get started now, you can always apply online!
*While it is Movement Mortgage’s goal to provide underwriting results within six hours of receiving an application, process loans in seven days, and close in one day, extenuating circ*mstances may cause delays outside of this window.
FAQs
They evaluate credit and payment history, income and assets available for a down payment and categorize their findings as the Three C's: Capacity, Credit and Collateral.
What are the three C's of underwriting most of the risks and terms that underwriters consider fall under? ›
Most of the risks and terms that underwriters consider fall under the three C's of underwriting: credit, capacity and collateral.
What are the 4 C's required for mortgage underwriting? ›
Standards may differ from lender to lender, but there are four core components — the four C's — that lender will evaluate in determining whether they will make a loan: capacity, capital, collateral and credit.
What 3 things are required before you can get a mortgage or at least a good one )? ›
Pre-approval requires proof of employment, assets, income tax returns, and a qualifying credit score. Mortgage pre-approval letters are typically valid for 60 to 90 days. Upon pre-approval, the lender will provide the maximum loan amount, which helps set a price range for the home shopper.
What are the three C's that lenders look for? ›
Students classify those characteristics based on the three C's of credit (capacity, character, and collateral), assess the riskiness of lending to that individual based on these characteristics, and then decide whether or not to approve or deny the loan request.
What do the three C's include? ›
Have you ever asked a mechanic for advice only to get bombarded with follow-up questions? If so, what you experienced was the start of a methodical repair process known as "The Three C's." The three C's are as follows; Concern, Cause, and Correction.
What are the three main elements of underwriting? ›
#1 Loan underwriting
Three primary factors—income, valuation, and credit score —are used by loan underwriters to determine whether a loan will be repaid. The loan underwriting process frequently relates to a mortgage.
What is an underwriter 3? ›
Mortgage Underwriter III underwrites mortgage loan applications and evaluates loans in order to maximize organizational profit and minimize risk or loss. Monitors property appraisal process and assists with property inspections. Being a Mortgage Underwriter III assesses risks to determine approval status.
Which of the three C's of credit refers to an asset that a lender accepts as security for a loan? ›
Collateral is sometimes called “capital.” Whichever term is used, both refer to a borrower's assets that can be used to secure the loan.
What are the 5 Cs of mortgage underwriting? ›
Lenders score your loan application by these 5 Cs—Capacity, Capital, Collateral, Conditions and Character. Learn what they are so you can improve your eligibility when you present yourself to lenders.
One of the first things all lenders learn and use to make loan decisions are the “Five C's of Credit": Character, Conditions, Capital, Capacity, and Collateral. These are the criteria your prospective lender uses to determine whether to make you a loan (and on what terms).
What are the 5 Cs of lending? ›
Each lender has its own method for analyzing a borrower's creditworthiness. Most lenders use the five Cs—character, capacity, capital, collateral, and conditions—when analyzing individual or business credit applications.
What is the 1 3 rule mortgage? ›
As a rule of thumb, many people estimate they are able to afford a mortgage of 2 to 3 times their. household income. For example, if you annual income is $30,000, you might be able to afford a. mortgage of $60,000 to $75,000: $30,0000 X 2 = $60, 000.
What are at least 3 things that are prohibited as practices in the mortgage lending markets? ›
Fair lending prohibits lenders from considering your race, color, national origin, religion, sex, familial status, or disability when applying for residential mortgage loans.
What are the 3 most important things when buying a house? ›
The Location
They say the three most important things to think about when buying a home are location, location, location. You can change almost everything else, but you can't change your home's location.
What are 3 factors that the credit bureau will check to determine creditworthiness? ›
Understanding Creditworthiness
so, lenders look at several different factors: your overall credit report, credit score, and payment history.
What is capacity in the 3 C's of credit? ›
Character: refers to how a person has handled past debt obligations: From the credit history and personal background, honesty and reliability of the borrower to pay credit debts is determined. Capacity: refers to how much debt a borrower can comfortably handle.
Which of the 3 C's refers to the loan applicant's ability to repay the loan? ›
Capacity. Capacity refers to an individual's or organization's ability to repay a loan. It includes factors such as income, expenses, and debt-to-income ratio. Lenders look at a borrower's capacity to repay a loan to ensure that they will be able to make the required payments without defaulting.
What does the 3 C's stand for? ›
Character, capital (or collateral), and capacity make up the three C's of credit.
Why are the 3 C's important? ›
Make sure your classroom culture is one they will want to remember. By using the three Cs of compliments, competition, and celebration, you'll be one step closer to creating an atmosphere your students will treasure.
Lenders score your loan application by these 5 Cs—Capacity, Capital, Collateral, Conditions and Character. Learn what they are so you can improve your eligibility when you present yourself to lenders.
What will make underwriter deny loan? ›
An underwriter can deny a home loan for a multitude of reasons, including a low credit score, a change in employment status or a high debt-to-income (DTI) ratio. If they deny your loan application, legally, they have to provide you with a disclosure letter that explains why.
What are the three C's considered in deciding to underwrite a loan which uses the housing expense ratio as ›
"Three Cs" of home loan underwriting are collateral, creditworthiness, and capacity.
What are the basic principles of underwriting? ›
Underwriting has to do with the selection of subjects for insurance in such a manner that general company objectives are met. The main objective of underwriting is to see that the risk accepted by the insurer corresponds to that assumed in the rating structure.
What are the basics of underwriting? ›
Underwriting simply means that your lender verifies your income, assets, debt and property details in order to issue final approval for your loan. An underwriter is a financial expert who takes a look at your finances and assesses how much risk a lender will take on if they decide to give you a loan.
What are the four Cs of approval for a loan? ›
Credit, Capacity, Capitol, and Collaterals are the four important Cs in the mortgage world and the most looked-at factors by banks when it comes to loan approval.
What are 5 Cs of lending and explain what they mean? ›
The criteria often fall into several categories, which are collectively referred to as the five Cs. To ensure the best credit terms, lenders must consider their credit character, capacity to make payments, collateral on hand, capital available for up-front deposits, and conditions prevalent in the market.
What are the 4 Cs of credit? ›
Note: This is one of five blogs breaking down the Four Cs and a P of credit worthiness – character, capital, capacity, collateral, and purpose.
What can fail in underwriting? ›
Your credit history or score is unacceptable.
This is typically only an issue in underwriting if your credit report expires before closing, and your scores have dropped. It can also become a problem if there's an error on your credit report regarding the date you completed a bankruptcy or foreclosure.
What can mess up underwriting? ›
If your credit report has changed since then, your loan could be denied if the changes don't meet the lender's underwriting standards. Your credit report could be negatively impacted if, for example, you miss a payment or took out a new loan such as an auto loan or credit card.
About 8% of mortgage loans are denied in the underwriting process, so you've got about a 1 in 12 chance of having your mortgage denied after it once looked good enough to be approved.
What are the 5 C's that lenders use to judge credit worthiness during financing decisions? ›
One way to do this is by checking what's called the five C's of credit: character, capacity, capital, collateral and conditions. Understanding these criteria may help you boost your creditworthiness and qualify for credit.
What are the three C's that creditors use to determine if you are approved for a loan or not explain how each works? ›
They are known as the “Three C's of Credit”: Capacity, Character, and Collateral: (1) Capacity: What is the individual's ability to repay the loan? (2) Character: What is the individual's reliability to repay the loan? (3) Collateral: What assets does the individual own that could be sold to repay the loan?
Which of the 3 C's of credit relates to if you have investments to use as collateral? ›
For example, when it comes to actually applying for credit, the “three C's” of credit – capital, capacity, and character – are crucial. 1 Specifically: Capital is savings and assets that can be used as collateral for loans.
