Step 4 - Underwritting

Underwriting is the process of evaluating your credit history, debts, assets, income, and information about the property you are looking to purchase, in order to make a mortgage loan decision.

General Factors Consider when Underwriting (The 3 C's)

Collateral

If it is a conventional mortgage (25% down payment) the property's value is confirmed by an independent appraisal comparing the subject value with at least three properties that are similar and have sold within the last three to six months in the area.


Capacity

The borrower's income and overall debt structure are evaluated to determine that she/he has the ability to pay the loan back on a timely basis.


Credit

The borrower's past credit history is evaluated to make sure that she/he has a history of paying their current obligations on time.


Specific Factors Considered when Reviewing your loan

Housing-to-Income and Debt-to-Income Ratios
Credit History
Ability to Repay the Mortgage
Cash and Reserves
Collateral


Housing-to-Income (GDS) and Debt-to-Income (TDS) Ratios

There are two sets of ratios that enable lenders to evaluate whether you are able to afford a mortgage payment in addition to your other financial obligations. [Note: when determining your housing expenses, you should include principal, interest, real estate taxes, heating cost, and mortgage insurance (if you are required to have it)].


The GDS Ratio: Your Housing-to-Income Ratio

This involves measuring your proposed monthly housing expenses (housing) against how much you earn (income). This ratio is calculated by dividing your proposed monthly housing expenses by your gross monthly income. Lenders typically require that this ratio be 32% or less.

The TDS Ratio: Your Debt-to-Income Ratio

This involves measuring how much you owe (debt) against how much you earn (income). The Debt-to-Income ratio is determined by dividing your total monthly debt (to include your proposed monthly mortgage payment, minimum payments on all revolving credit accounts and monthly installment payments) by your gross monthly income. Lenders typically require that this ratio be 40% or less.
Generally, the lower your ratios, the better your financial condition. As the ratios increase, so does your level of risk. When the ratios are higher, the lender will look for other compensating factors to offset the risk. These compensating factors would include such things as a large amount of financial assets, stability of employment, higher down-payment or interest rate, and good credit history.


Credit History

Your credit plays an important role when lenders are determining whether to lend and what interest rate to charge.


Ability to Repay the Mortgage

The lender will try to determine your ability to repay the loan by reviewing your employment information. They will take into consideration how long you have worked consecutively, your occupation, and how much you earn. The lender will verify your income by reviewing documentation such as recent pay stubs, pension statements, income tax returns, interest-earning statements, T4 forms, and/or by contacting your employer. The lender will also review your expenses; whether you pay alimony and/or child support, along with the amount of your other monthly obligations.


Cash and Reserves

Do you have enough money for the down-payment, closing costs and prepaid expenses and what money will you have left after you've bought your home? Lenders refer to the money you have left after you've bought your home as 'reserves'. Reserves can include money in your chequing/savings, mutual funds, retirement accounts, stocks, and bonds. Typically, borrowers with a higher amount of reserves are a lower risk. Lenders often look for you to have a minimum of two months of mortgage payments left in your account after the closing. However, not all mortgage programs require that you have reserves.


Collateral

A factor that is considered when evaluating your mortgage application is the amount of money you plan to invest or have invested in your home. Your equity is the amount of your financial interest in your home. If you are purchasing, it is the amount of your down-payment. If you refinance your mortgage, it is the difference between the fair market value of your home and the amount that is still remaining on your mortgage.
A factor that is considered when evaluating your mortgage application is the amount of money you plan to invest or have invested in your home. Your equity is the amount of your financial interest in your home. If you are purchasing, it is the amount of your down-payment. If you refinance your mortgage, it is the difference between the fair market value of your home and the amount that is still remaining on your mortgage. Lenders will make sure that the value of the property is sufficient to support your loan. The lender will order an appraisal of the property in order to determine its value. The loan-to-value ratio (the amount of your mortgage as a percent of the value of your home) may offset other risks that are identified in your mortgage loan application. In other words, the more equity you have in your home, the lower the risk.
Once your loan application has been underwritten, loan processing can begin

Proceed to Step 5 - Processing

Go Back to Step 3 - The Application


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