Underwriting: How Lenders Choose Borrowers

Completing an application is just the first step in getting approved for a loan.

By Navy Federal February 26, 2016

A lot happens between the time you submit a mortgage loan application and its approval. So before you pack your bags and hire a moving truck, learn about underwriting and why it matters to you from Navy Federal loan officers.

Q. What is underwriting?

A. Underwriting is the process of determining your creditworthiness for a mortgage. A loan officer investigates and verifies the information you provide on your loan application and decides whether to approve the loan.

Q. What do loan officers look at?

A. Loan officers typically:

  • check credit scores
  • compare your debt-to-income ratio to determine whether you can afford the monthly payments
  • assess the Loan-to-Value (LTV), which is the amount of the loan compared to the appraised value of the asset (a high LTV is considered riskier for the lender)

Basically, they're looking at the three C's of credit: 1) your capacity to repay the loan, 2) your credit history and 3) the collateral (the asset).

Q. I have a great credit rating. Does that guarantee I'll be approved?

A. A credit score over, say, 740 (the max is 850) will certainly work in your favor, but it doesn't guarantee a loan will be approved. A loan officer looks at all factors, so borrowers with high credit scores can be denied if their income is too low or the LTV is too high. On the other hand, a lower credit score (within reason!) doesn't automatically mean a denial if income, assets and LTV are all within guidelines. However, it may mean paying a higher interest rate than someone with a better credit score because the lender is taking on more risk.

Q. What can trip up the underwriting process?

A. Discrepancies between income reported on the application and income reported by employers or on tax returns are major red flags. Poor credit scores can also deny a loan.

Q. What can I do to help the underwriting process?

A. Before applying for a mortgage loan, check your credit reports and correct any errors. Then, fill out your loan application completely and accurately. Provide any supporting documentation requested by the loan officer and respond promptly if more information is requested.

Q. What happens when underwriting is completed?

A. You'll be approved for the loan, approved with conditions (which may involve providing more documentation or a bigger down payment) or denied. Your loan officer will contact you with the news–hopefully good news!

This article is intended to provide general information and shouldn't be considered legal, tax or financial advice. It's always a good idea to consult a tax or financial advisor for specific information on how certain laws apply to your situation and about your individual financial situation.