Loan Underwriting Process Overview

Loan Underwriting Process

• Loan underwriters assess borrower risk by examining assets, income, debt, credit history, and property.
• Verification of repayment ability occurs according to ATR/QM rules, often through Automated Underwriting System (AUS) findings.
• Analysis of borrower qualifications begins before application submission and continues throughout processing.
• Calculations are performed initially during application intake and reconfirmed with borrower & third-party verification.

Down Payment and Loan-to-Value (LTV) Ratios

• Loan programs have minimum down payment requirements, some with zero.
• To calculate required down payment: (sales price or appraised value) x (down payment percentage).
• Example: 5% down payment on a $150,000 sale = $7,500.
• Down payment differs from closing costs, some of which may be included in the loan amount.
• LTV ratio is the loan amount's proportion to the property value (reversed minimum down payment).
• To calculate LTV: (sales price or appraised value) x (loan-to-value ratio).
• Example: 95% LTV on a $150,000 sale = $142,500.

Combined Loan-to-Value (CLTV) Ratio

• CLTV considers all mortgages on the property (e.g., purchase money, existing second mortgages).
• Calculate CLTV by adding mortgages and using the LTV calculation (with total mortgage amount).

Asset Verification

• Assets (possessions with monetary value) are verified to ensure sufficient funds for down payment and closing costs. 
• Funding sources are verified to prevent hidden or undisclosed loans. 
• Cash reserves after closing are a risk consideration and possible program requirement.

Asset Types

• Cash and Cash Equivalents: (Checking, savings, money market, CDs) verified by Verification of Deposit (VOD) or bank statements.
• Physical Assets: Tangible, valuable assets (e.g., cars). Often not verified unless used to meet closing costs (requiring appraisal, ownership proof, and sale confirmation).
• Nonphysical/Intangible Assets: (Trademarks, patents, goodwill). Generally, not acceptable for closing costs and not verified.
• Liquid Assets: Nonphysical assets easily converted to cash. (e.g., stocks, bonds). Verified with borrower-provided statements and value confirmation.
• Fixed Assets: Tangible goods (furniture, art). Not commonly verified, similar to physical assets.
• Equity Assets: Ownership interests (businesses, non-publicly traded securities, life insurance). May be acceptable as closing funds if verifiable.
• Fixed-Income Assets: Investments that generate interest (bonds, CDs). Usually liquid, although liquidation may incur penalties or reductions in value. Verification of liquidation value for qualification may be needed. Verification requirements may vary depending on lender/loan program.

Income Verification

• Borrowers provide 2 years' employment history and income information. Monthly income calculation varies depending on payment frequency.
• Hourly: Hourly rate x hours worked = Weekly income, add overtime (rate x hours). Weekly income x 52 weeks = Annual income, then annual income / 12 = Monthly income.
• Bi-Weekly: Bi-weekly salary x 26 = Annual income, then annual income / 12 = Monthly income.
• Twice per Month: Monthly salary x 24 = Annual income, then annual income / 12 = Monthly income.
• Annual: Annual income / 12 = Monthly income.
• Special income circumstances (vacations, commission, bonus) may require adjustments based on verification or explanations.
• Seasonal work is averaged over 24 months (two years).
• Self-employed income is verified based on previous two years' federal tax returns.
• Non-cash expenses (e.g., depreciation) might be added back to income.
• Cash income (tips, unreported self-employment) must be reported on tax returns for at least two years to be valid.
• Capital gains are usually one-time income and not used for qualification.

Additional Requirements

• Borrowers must demonstrate the ability to meet future loan obligations, especially when income gaps exist.
• Borrowers need to provide evidence of ownership of additional assets that can be sold to meet mortgage payments if necessary.
• Asset income (e.g., stock dividends, interest) needs unrestricted account access for qualification.