The 4 C’s of Mortgage Underwriting
Following the subprime lending crisis, the Consumer Financial Protection Bureau imposed new rules that were geared towards protecting the borrowers. According to this new rule, lender must ensure that borrower qualifies for the loan. This is the reason it has become a priority for lenders to scrutinize each application and supporting document closely.
While approving or denying loans to prospective borrowers, lenders take the most basic approach known as the 4Cs of underwriting. Each of these aspects must be fulfilled in order to secure a mortgage. A team of underwriters commissioned by lenders verify and validate all the information on your application. The level of verification depends on how risky lender considers the borrower to be.
Let us discuss the 4 Cs of underwriting in detail and see how it impacts a borrower’s application.
Also known as home appraisal, collateral takes many factors into account before it attaches a value to the property. Property location, size, condition of the home, rebuilding cost, cost of other similar homes etc. is taken into consideration. As a lender, your objective is not to foreclose the property, but to have a security that you can use to safeguard the loan, should the buyer default on their payments.
A good collateral has the following characteristics:
- Value is easily ascertainable and covers the loans
- Retains value through the entire period of the loan
- Can be easily foreclosed or ownership can be easily transferred
A borrower’s repayment abilities are evaluated by reviewing their previous payment trends. Factors such as payment history, total outstanding debt, revolving credit etc. are evaluated to assign a credit score that reiterates buyer’s payment likelihood in the future. Based on this rating, the lenders offer better loan terms to borrowers who have higher credit score. A loan officer can run a credit check during the initial stages of loan application to identify potential issues that can arise later. Having this information before hand better equips the lenders and loan officers to deal with these issues.
Proper Credit review of a borrower helps to:
- Determine the size of the debt burden relative to earnings.
- Confirm loan requirements are met in spite of debts
- Understand if the borrower can be offered higher credit
The analysis conducted to evaluate a borrower’s income against their projected debt is called capacity. This factor determines the borrower’s ability to repay the loan. While establishing borrower’s capacity, lenders take two calculations into account – Housing Ratio and Debt Ratio. Lenders review the client’s debt to income ratio to determine if they can make the payments on a regular basis. Student loans, car loans and credit cards can impact the loan amount that will be approved. Lenders also take stability of the borrower into account and the time they have been in their current jobs.
Capacity in mortgage helps to look into the following:
- The source and type of income (e.g., salaried, self-employed or commission)
- How long have they been receiving the income and how stable has it been?
- How long the income is expected to continue in the future
This aspect of the 4 C’s takes the borrower’s assets into consideration. Underwriters look at cash in reserve and cash in transaction. They also scrutinize the bank statements to determine where the closing money will come from. The borrowers are allowed to use gifts as down payment, as far as they have a valid paper trail to justify the money. They must also document all the large deposits made into their bank accounts. The loan officer should always be informed about the origin of large sums of money.
Cash reserves include the following:
- Total Savings
- Money market funds
- Investments that can be converted to cash
As a lender, it is very important for you to understand the 4C’s of underwriting process to gain deeper insight into the borrower’s loan application. Working with highly qualified underwriters will ensure that each aspect corresponds with another. Expert Mortgage Assistance has a team of trained underwriters who understand the intricate mortgage procedures like the back of their hands. We are proud to offer the best and most reliable outsource mortgage modification and origination underwriting services to our clients. Talk to our experts today and let us help you gain complete control over your underwriting process.