Underwriting
and the Mortgage Loan Application Process

Assessing 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.

Income
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, etc.

Expenses
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.

Assessing 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.

Assessing 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.

What 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 fact, 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.

What 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.

The lender 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.

What 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 loans.