Hooray! You Applied For A Mortgage! Now What?

You found your perfect dream home, you put in an offer, they accepted, and now you have to figure out how to pay for it. Once you apply for a mortgage, you might be wondering what comes next.

You filled out an application. You’ve sent in what seems like every single paystub, W2, and bank statement you’ve ever gotten, but who’s looking at it? And what exactly are they looking at?

Once you send all your stuff to your lender (aka the people giving you the money), it goes to an underwriter to review. The underwriter is the one who ultimately decides whether or not you get that money.

While all this sounds scary and confusing, it doesn’t have to be! Let’s talk about what the underwriters are actually looking at.

Underwriters review three main points when they review a loan, called the “Three Cs”. It’s just like diamonds, but um, less exciting. The 3 Cs of underwriting are credit, capacity, and collateral.

Credit

First, let’s talk about credit. What is the underwriting reviewing here? Basically, they are looking to see if you have a habit of paying your bills.

They are reviewing your credit score. They are looking at payments on any mortgages, credit cards, and any loans you might have. They also are looking at how long you’ve had accounts open.

Credit scores are determined by three major credit bureaus, TransUnion, Experian, and Equifax. They take into account your entire credit history and toss out a score based on it.

The next thing an underwriter looks at is your payment history on all of your open (and closed) accounts. This includes any credit cards, loans, mortgages, and student loans. If you have a history of paying these bills on time in the past, then a lender will assume that you pay will pay them back, too. And that’s what we’re going for here!

Another thing the underwriter looks at is the length of time you’ve had credit accounts open. Again, they’re just looking at your history to hopefully predict the future.

At the end of the day, the underwriter is looking at your credit report to try to make sure you are going to pay the lender back.

Capacity

Capacity is a fancy word for “can you afford to pay this mortgage back?”. This is where the underwriter is going to look at your income and bank statements. They want to see how much money you make and if you have money in the bank or a retirement account.

Income

In order to figure out your income, they are going to look at your paystubs and W2s, unless you’re self-employed. We’ll get into that later.

When they look they look at your paystubs, the first thing they are trying to see is if you get a fixed salary or if you get paid by the hour. They are also going to look to see if you have any extra income like commission or bonus.

If you get paid a straight salary, that’s easy peasy, and they just take that amount to calculate it. If your paycheck varies from week to week or month to month, then they’ll take an average. Most of the time, they average what you’ve made this year with what you made last year as well.

If you own your own business, the underwriter is going to want to see your tax returns. If your business is a sole proprietorship, you’ll just need your personal returns. If you file a partnership or corporation, you’ll need your personal and business returns. You also might have to provide a year-to-date profit and loss statement. Most of the time, the underwriter will figure out your income based on an average of the last two years. FYI — the income they use is going to be based on your NET income, not the total sales of your business.

Assets

The next part of “capacity” is your bank statements. This is the underwriter wanting to get a picture of how much money you may have. You might not need to show any bank statements if you aren’t bringing any money to close. But, you might have to show both “funds to close” and “reserves” for your loan.

Funds to close means the amount of money you have to bring to the closing table when everything is said and done. A lot of times, a mortgage only covers 95% of the total purchase price, so you might have to bring 5% in your own funds. This might come from your savings, taking money out of your retirement account, or even a gift from a family member.

Reserves are the other part of assets. This is money leftover in your account after the money for closing — aka your rainy day fund. Again, you might not need to have reserves depending on what kind of loan you are getting. But having extra money in the bank helps your loan profile. It makes you less of a risk to lend money to.

Collateral

The final piece of the puzzle is the collateral — aka the house you are buying. This is the one you have the least amount of control over, but it’s still a really important part of the underwriting process.

On most loans, you’ll need to get an appraisal, where a licensed appraiser goes into the property to take pictures, measure, and checks the property. The appraiser will also be looking to make sure the house is safe and doesn’t need any major work.

The value of the house is based on how much similar houses around you sell for. The appraiser pulls a big list of all the houses that have been sold and look for the ones most like your house. They figure that out based on size, the number of rooms, amount of land, and extras like pools, garages, or outbuildings.

Sometimes the appraised value is actually lower than the amount you agreed to buy the house for. If that’s the case, you might have to bring the difference unless you can convince the sellers to lower the purchase price.

Conclusion

Although applying for a mortgage can be scary, knowing the process will hopefully help you feel a little better about it. Remember, the underwriter really wants to approve your loan. They want you to achieve the American dream. Knowledge is power and knowing what is expected should help your whole mortgage experience smoother.

I know this can seem overwhelming, but there are people out there to help! Contact a local mortgage broker. Not only do they know the process, but they know your area and are part of your community. They can guide you through the whole process.

Good luck!