Mortgage Calculators and the Underwriting Process

Many factors influence the costs and the ability of a borrower to obtain financing for a home loan.  Using mortgage calculators facilitates the understanding of the loan process and helps ascertain the user’s qualification strengths and weaknesses.  The user should be alert that the numbers input and output from the mortgage calculator are only estimates.  The loan underwriting process is the task of the mortgage lender to validate the income, assets, the property and credit of the borrower.  In the mortgage business the usual routine was that the application is what the customer says their income, expenses, assets and debts are and the underwriting process investigates and determines what the facts are.

Some factors that are input to a mortgage calculator such as the interest rate and term will influence how much the monthly mortgage payments will be.  Other factors such as the amount of down payment, the borrower’s monthly income and credit history can impact the mortgage loan approval regardless of the payment factor.  Mortgage affordability calculators will do a good job of taking basic mortgage underwriting debt ratios to further ascertain the qualification standards of a borrower.  Mortgage payment calculators and mortgage affordability calculators get the borrower closer to a level of certainty regarding their potential loan approval; however, they can not evaluate all aspects of loan decisions.

Mortgage calculators are a good resource to estimate the loan amount appropriate for a borrowers based on their current positions.  But can often miss some of the possible limiting factors such as adequacy of down payment, sufficient reserves, credit profile, income stability, and to assume additional debt or the ability to handle payment changes
These factors are evaluated by the underwriting department of the mortgage company.

The main components of the underwriting process include:

LTV

LTV or the loan to value ratio is a ratio that measures the loan amount divided into the appraised value or the sales price, whichever is less, of the home.   For example, a loan of $100,000.00 on a home valued at $200,000.00 has a 50% LTV.  A borrower who wants to put a down payment of $20,000.00 on a $100,000.00 home will have an LTV of 80%.  The higher the LTV, the stricter the guidelines are for the mortgage.  LTV analysis can be performed fairly easily on comprehensive mortgage calculator or mortgage affordability calculator as well.  Other than the appraisal on the property the mortgage calculators measure this number well.  A noteworthy consideration that the mortgage company will review along with the LTV is what the source of the borrower’s down payment on a purchase and how much money the borrower will have in the bank after the down payment.  That figure is usually referred to as reserves.

Debt Ratio

Mortgage lenders review the capacity of the borrower to repay the mortgage loan.  Lenders calculate the debt ratio, dividing the total monthly housing expenses or the mortgage payment with taxes and insurance into their gross monthly income.  In addition, the ratio of total debt payments, the housing expenses for the proposed loan plus the borrower other monthly credit obligations, by the total monthly income.  These numbers can be entered into a mortgage calculator by a user directly to gauge qualifications.  The mortgage calculator does not review the quality of the numbers.  The underwriter of a loan makes sure the income is calculated correctly, that the debt payments are accurate and the income is consistent and likely to continue at the present level or greater.

Credit

Mortgage lenders frequently use credit scores to determine the credit risk.  The higher the credit score, the better the credit risk.  Along with the credit score the underwriting process will involve the evaluation of other aspects of the borrower’s credit profile including: the borrowers payment history on an existing, or previous mortgage, the overall credit history on each account, and public records such as bankruptcies, foreclosures and judgments.  Standard mortgage calculators are not generally up to the task to evaluate credit.  Mortgage calculators have tried to enter this part of loan evaluation mechanism, but evaluating a borrower credit profile is an extremely complicated process.

The approval of a home loan and the interest rate a mortgage company will charge depends on these three main factors.  Some compensating factors are also reviewed, such as a history of savings, long term job stability, a history of making monthly credit payments, and a substantial down payment or a large cash reserve.  Mortgage calculators should be used by borrowers to estimate their numbers and qualification position as well as to help better understand the terms and process of a home loan approval.  Mortgage calculators do have there limitations and a representative of a mortgage company or bank can help to turn the prequalification numbers into an approval.

This entry was posted on Thursday, December 11th, 2008 at 3:51 pm and is filed under Mortgage Articles. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.