Everyone wishes to own their dream house or dream car or invest in property to have a secure future. Individuals take out mortgages to finance their purchases from private lenders or financial institutions. The lenders access your creditworthiness before lending you the money to prevent any financial default which is known as the loan underwriting process. The process carried out by the bank, credit union, or mortgage lender assesses the risks involved in lending you the money before approving your application. Below listed are the factors that may affect the loan underwriting process.
1. Credit score
Your credit score represents how disciplined you have been in managing and repaying your past loans. This is the most crucial factor that can affect loan underwriting. A credit score above 750 denotes that you are a responsible borrower hence enhancing your creditworthiness. Having a good credit score also allows you to avail of a loan at competitive interest rates. Whereas, a poor credit score can put off or cancel the entire money borrowing process.
2. Income
Your monthly or annual income plays a crucial role in the credit underwriting process as you cannot get the required loan amount if your income is below a certain fixed limit. Private lenders or financial institutions fixed these limits because their ultimate goal is to ensure that you will successfully be able to pay the EMIs. Additionally, the underwriters also take into account if you are a salaried employee or self-employed. Salaried employees hold an edge over others as they have a regular source of income.
3. Ongoing debt and liabilities
your current debt and liabilities depict your loan repayment ability and pattern. The underwriter checks on them to ensure that you will be left with a sufficient amount of money after paying all your debts to repay the loan amount or EMIs.
4. Value of the Collateral
To take a heavy loan, such as a home loan, or car loan, etc you are required to pledge a valuable asset you own as collateral. The collateral’s value is compared with the loan amount to ensure that in care of any default, the collateral can be used to recover the loan amount. Hence, the value of the collateral must be equal to or higher than the loan amount.
Once the underwriting process is completed, you may receive one of the following decisions:
1. Denied
There can be many reasons if your application gets denied such as you have too much debt, your credit score is too low, etc. However, you can apply again in a few months after improving your credit score and other factors.
2. Suspended
Your application may get suspended if some document is missing from your file and hence can not be evaluated by the underwriter. However, you may be able to reactivate your application by providing the required documents.
3. Approved
The approval of your application can come with many conditions such as tax forms, proof of mortgage insurance, a copy of the business license, and much more. After approving these conditions, your loan amount is almost granted when you will sign the final paperwork and settle any closing cost that may be due. All these validations are simplified through an automated underwriting process these days.
Tip: Keep all your documents handy and all your financial scores maintained up to a certain limit to carry out a smooth loan underwriting process.
