Purchasing a house requires a lot of time and effort, as do all the requirements. If it’s your first time buying a home, it can be exciting but confusing. You must do research before you apply for a mortgage Ontario. One of the processes they do when you use is mortgage underwriting.
What is Mortgage Underwriting?
Mortgage underwriting is analyzing your personal financial information to evaluate whether or not it satisfies the mortgage lender’s criteria. It will determine your risks to the lender and whether you are eligible for a loan.
The downside is most companies do underwriting after you’ve found the house you want to purchase, bid, and apply for a mortgage. This means you can lose the home if the underwriter takes time to decide.
In mortgage underwriting, they gather and review your documents and information before they’ll be able to evaluate your assets, credit history, and income for your down payment. Then they categorize those findings into the 3Cs.
What are the 3Cs of Mortgage Underwriting?
1. Capacity
An underwriter will determine your debt-to-income ratio. The debt-to-income ratio, or DTI, compares your monthly gross income and existing debts. Your existing debts shouldn’t be more significant than your monthly income. DTI is usually in percentage. It shouldn’t be higher than 39%.
They will verify if you have enough to fund your down payment for a mortgage loan Canada. If your down payment is less than 20%, they will require you to get mortgage insurance which protects the lender.
2. Credit
Basically, this process will require analyzing your credit report. They’ll look into your credit history and see if you are paying your debts on time or if there are red flags on your credit report.
They’ll request your credit report to credit bureaus, and they will start there. Although, it could hurt your credit score because requesting your credit report is a hard inquiry.
Your credit report also determines what loan will work for you and your interest rates. Your credit score will be the first basis for getting the best mortgage deals.
3. Collateral
Collateral is what secures your loan. In any case of default, they can legally seize the property you put as collateral. Your car is a car loan, or your house is a mortgage.
The lender will determine your loan-to-value or LTV after ordering a home appraisal to determine the home’s value. Your LTV is determined when the loan amount and appraised value or purchase amount, whichever is higher.
What are the chances of getting denied in mortgage underwriting?
Mortgage underwriter denies about 8% of mortgage applications. Though the denial rate will always depend on the location and loan type.
Your Application can be Denied if:
1. The information you provide is incomplete or cannot be verified.
2. Your debt-to-income ratio is high, or you’re paying more on your existing debts than you earn.
3. You cannot verify the money for closing costs and down payment.
4. You’re unable to prove that you have a stable income.
What is a Mortgage Underwriter?
An underwriter will see your credit history, assets, and income if they will match the loan you are applying for. It will determine how likely you are to make the mortgage on time.
An underwriter analyzes these documents, and their analysis can affect your mortgage approval. Underwriting can take approximately 11 to 25 days because of the complexity, number of tasks, and importance of making a fair decision based on these documents.
A Comprehensive Explanation of what Underwriters do:
1. Verify income and employment
An underwriter verifies your income and employment to ensure you can fund the down payment and other additional costs and to provide you can pay monthly mortgage payments without default. They need to have proof that you have a stable income.
They will require your W-2 for the last two years. W-2 is a report of how much you earn from your employer and the tax on your behalf during the tax year.
A more extensive set of documents is required for self-employed borrowers. They will need your profit and loss statements, balance sheets, K-1, and recent personal and business tax returns.
2. Underwriter will examine your credit history and credit score
When determining creditworthiness, a credit score is the most important thing to consider with its three-digit number. The higher your credit score, the greater your chance to loan approval.
Credit history is a summary of your loan transactions. Using a credit report, they can see your credit history. Which contains any possible red flags on the borrower’s side. It will show if you have any defaults or any missed and late payments.
These can have a significant effect on your approval.
3. Analyze your debt-to-income ratio (DTI)
As mentioned earlier in this article, your DTI will determine your capacity to repay the loan you’re taking out. That is why you must maintain your DTI ratio as low as possible.
4. They need to ensure you have savings and assets
Savings are the borrower’s safety net. In any case, they face problems during their mortgage payment, so they have reserve money that they can use to avoid missed payments.
An underwriter also ensures you have assets that can be turned into liquid cash. It can be stocks or bonds. It can also be your car or artwork, anything that has value.
5. Have an appraisal of the home and property
A lender will only loan you an exact amount of how much your desired home will be. That is why an underwriter will have an appraisal of the house to ensure that the amount you’re borrowing and the home value are compatible.
After these tasks are completed, an underwriter will make a decision on whether they will approve you or not. An underwriter can:
- Approve your loan
- Deny it. Or;
- Approved with conditions
If they approve your loan, you can proceed with the closing. “Approved with conditions” has something to do with your documents. If you have already cleared out, you’ll get a “clear to closing” signal from them.
Denial can be the worst thing that they can give you. Meaning they won’t approve your loan application.
Conclusion:
Underwriting is just as significant as the other processes you go through when applying for a mortgage. You have to take every step seriously. It would be best to be well-prepared before you use for a mortgage to avoid more stress and trouble when you’re already in the process.
If you still have any questions, email or call us at +1 416-825-0142. Private Mortgage Canada will be happy to answer all your questions.
