The ultimate goal of a mortgage lender is to sustain their business by ensuring that every loan receives prompt and timely payments. No lender wants to head the dreaded word, ‘foreclosure’. A rise in the number of defaulters can spell doom for lenders. This is why all of them leave no stone unturned in their effort to determine if a borrower is capable of paying back the loan amount or not. And to facilitate lenders take a decision, underwriters have a major role to play.
Loan underwriting is a high-risk process that involves an underwriter to be the authority to approve a loan amount that usually goes into hundreds of thousands of dollars. The smallest of niggles in borrower or property documentation would quickly transform into ugly lawsuits and painful foreclosure processes. These instances can threaten the very roots of mortgage lending businesses.
An underwriter’s job is to identify delinquency in a candidate. Based on the situation, the loan underwriting process changes course. An underwriter usually relies on evidence and an eye for detail when going through the financial documents of a borrower. How they assess risk, goes into much more detail about how the borrower’s details pop out to the underwriter in:
Loan Application Assessment: The process of risk assessment can begin right at the loan application process. Underwriters look for the ideal scenario from borrowers, a steady source of income and with as fewer commitments that bleed finances, as possible. Employment status, professional experience, income and domain of employment give the underwriter the first chance to understand the borrower better.
Equating the source of income and gaps in employment gives an underwriter insights like ‘Debt-to-Income Ratio (DTI) and ‘Maximum-Loan-to Value (LTV)’ These values help the underwriter to place the borrower in terms of the risk that comes associated with approving a loan for them. Starting the risk assessment process with the application review also enables the underwriter to strategize document examination as the mortgage loan underwriting process progresses.
Credit Profile: Any instances of delinquency or a lack of commitment thereof is taken into account by the underwriter while assessing a borrower’s credit history. A credit check, as this process is called, reveals previous issues with lenders such as foreclosures and bankruptcy.
Underwriters examine the credit score, loan amortization schedule, financial reserves, sincerity in past loan payments, tax returns and more. This gives them a ‘profile’ of the borrower that tells them how much risk comes associated with approving the loan for a particular candidate.
Financial Documents Review: Reviewing the financial documents of a borrower which are mainly bank statements, gives underwriters an idea about their spending habits. They look for specific and peculiar behavior such as spending money regularly at specific social locations such as clubs, to gauge gambling addiction.
Bank statements also reveal sources of income that were not revealed by the borrower before the pre-approval process such as financial help from friends or family. These instances could be financial instability, which helps flag them as ‘high risk’ candidates in the loan underwriting stage
With a systematic approach to loan documents examination, underwriters can ensure that every loan that is being financed by a lender has the maximum chance of returning prompt repayments from the borrower.