In another era, the so-called Three C's of Credit were Character, Capacity and Capital. For home loans nowadays, the three C's are pretty much the same but are more commonly called Credit, Collateral and Capacity. Mortgage underwriting is the process lenders use to assess a borrower's risk to the lender through the three C's. It's a detailed and document-oriented process, which sometimes annoys borrowers.
First is the application with your loan officer or mortgage broker. She looks for red flags, then turns it over to a mortgage processor.
Next, the processor assembles all the documents--application, bank statements, pay stubs, investment accounts, financial statements, tax returns, and so on, as well as verifies student loan account balances, auto payments, credit card debt, and so on. Your credit report will be procured. The borrower will also have to obtain an appraisal of the house and provide it to the processor. The processor will make sure sure the package is complete and the documents are in order, and turn it over to the underwriter.
The underwriter will look at your debt-to-income ratio, which is your recurring monthly debt divided by your gross monthly income. Most lenders like to see this number to be at least 36, but the lower, the better. There's no hard and fast rule. Each lender has its own rules, and they can change fairly often. The lender is nearly always at the mercy of an insurer, such as FHA or VA, or an investor, such as Fannie Mae or Freddie Mac. Insurers and investors have their own rules.
The underwriter also determines whether or not your credit score conforms with the lender's guidelines. These vary from lender to lender. The credit history is important. The borrower's time on the job also comes into play.
The appraisal helps determine the value of the collateral, but other factors, such as the property type and loan purpose, come into the mix. Home equity loans, investment loans, and owner-occupied loans all have different underwriting rules (and interest rates), as do specialized loan products such as the FHA 203k. Loans with larger downpayments are viewed favorably and may offset negative elements elsewhere in the loan package. Different property types--condominiums, attached homes, zero-lot-line homes, homes located in Planned Unit Developments (PUD), and so on--matter.
That's because the lender looks at the loan, not the house. They make money lending, and underlying every loan decision is what would happen if the loan didn't get paid and the lender had to take the house. Condos are harder to sell than detached homes, for example. PUD neighborhoods with private streets are harder to insure and manage. Lenders don't want any house, but some are more undesirable than others.
Underwriters also look for factors not immediately obvious. These may or may not include easements and other title glitches, joint maintenance agreements on common driveways, odd floor plans, problems in a home inspection report or red flags contained in the appraiser's remarks.
One of the most frustrating things for me, and my clients, was an underwriter requesting paperwork about the time the loan was supposed to close. The two main causes were (a) the borrower not getting documents into underwriting in time, and (b) the loan officer being unfamiliar with required documentation and not asking for it upfront. Sometimes, a lender will change underwriting rules mid-process and cause a delay.
Here's some do's and don't's. DO get paperwork in right away. DON'T argue whether or not a particular document should be required. It's not negotiable. DO try to close before the end of the month. If closing lingers past the first, new pay stubs and perhaps account statements will be needed. DON'T yell at your loan officer. Notwithstanding the above, it's hardly ever his or her fault.
This post is meant to provide an overview. Each application and loan package is different, as are rules for various lenders, insurers and investors.