and the Mortgage Loan Application Process
When you get a mortgage loan to buy a home, you promise to pay
back the loan. And when a mortgage lending institution makes
your loan, it has determined that there is a good likelihood
that you can and will keep that promise. In making the decision
to approve or deny the loan, the lender will gather a variety
of information, including that relating to your past credit
experiences and the value of the property you want to buy. This
process is called "underwriting" and gives you and the lender
the best chance for success by ensuring that a thorough review
of all important information has been conducted.
Your Ability to Repay the Loan
Before approving a mortgage loan, the lender wants to be sure
that you have the ability to repay the loan. The lender reviews
and verifies information from the loan application about your
income and current expenses. The purpose of this assessment
is to make sure you have sufficient income to pay your current
debts as well as a mortgage payment.
The lender will ask for employment information, including
where you work, how long you have worked, and how much you
earn. The lender will also want to know if there are other
sources of regular income, such as a part-time job, alimony
or child support payments, or dividends and investment earnings,
The lender looks at how much you pay each month for expenses
such as credit cards, car loans, or other consumer loans.
The lender also wants to know about any other financial obligations
you might have, such as alimony or child support.
How You Have Managed Credit in the Past
The lender will also review your credit history to determine
how you have managed credit in the past. Your credit history
provides information about how much you owe on your credit
cards or other loans, how often you borrow, and whether you
pay your bills on time. How you have managed debt in the past
can give the lender a good indication of how you are likely
to handle the obligation of a mortgage loan.
the Value of the Property
The lender also must check the value of the property you want
to buy by getting an appraisal. The purpose of this assessment
is to make sure that the value of the home is more than the
amount of the mortgage.
Happens Once the Lender Collects this Information?
Once the lender has collected the information needed to complete
the mortgage loan application, it is evaluated to determine
if the loan can be approved. Until recently, this process
was always done manually, with the underwriter having to review
and evaluate each piece of information separately. Today,
many lenders are using automated underwriting - an innovative
and important tool in the mortgage industry.
in an effort to expand homeownership for all Americans, Fannie
Mae developed its own automated underwriting system, called
Desktop Underwriter® in 1995. Many lenders now use this system,
or systems like it, to underwrite loans.
is Automated Underwriting and How Does it Work?
Automated underwriting is a computer-based method that enables
mortgage lenders to process loan applications in a quicker,
more efficient, objective, and less costly manner.
enters information from the borrower's application into its
own computer system. This information is then communicated
electronically to an automated underwriting system, such as
Fannie Mae's Desktop Underwriter, and a credit report is obtained.
The automated system evaluates different pieces of information
and gives the lender a recommendation about whether or not
the loan meets the criteria for approval. In Desktop Underwriter,
a loan that does not appear to meet the criteria for approval
is referred to the lender with advice about areas in which
additional information could be helpful. The lender considers
the recommendation, along with the information gathered, and
makes a final decision. The lender always makes the final
decision, not the automated system.
are the Benefits of Automated Underwriting?
Using an automated underwriting system streamlines and speeds
up the review and approval process. And because each loan
is evaluated in the same, objective way, lenders are able
to identify more qualified borrowers and make more loans.
Fannie Mae's Desktop Underwriter, for example, looks at the
unique credit profile of every loan applicant and is able
to evaluate a borrower's strengths as well as potential risk
factors. For example, a borrower may have successfully managed
credit in the past, which would be considered a strength.
This same borrower may also have accumulated a lot of debt
or may only be making a small down payment. These factors
could be considered potential risks to the lender. The automated
underwriting system, however, is able to evaluate all of this
information in a way that recognizes that a borrower's strengths
in one area can offset other risk factors. As a result, more
borrowers are able to qualify and be approved for mortgage