How a Bank Underwriter looks at your Loan

So you are thinking about buying a house, or maybe just refinancing your current home. So you go to the bank (or Credit Union) either online or in person to apply for the loan. You’ve done your part, filling out all the paperwork. Now it is the underwriter’s turn to do his work. But what is he looking for? His job is to determine your credit worthiness. To do this he will look at three C’s: your collateral, your capacity, and your credit.

Collateral. In most cases, the property you are taking the loan out for is the collateral for the loan. In case of default, this is what the lender has to sell to recover their losses. They will look at the value, the marketability, and the condition of the property. The loan officer will also look at the money you have available for down payment, closing costs, cash reserves and other assets you may have.

Capacity. Next, the loan officer will look at your capacity to pay off the loan. He will look at things like your gross income(in relation to expenses), your employment history (do you have stable employment), and length of time at current / past residences (do you move around a lot). He will look at your debts that may affect your ability to repay a loan. He wants to know that you have the money available to pay a monthly loan.

Credit. What is your credit history – how have you handled loans and credit in the past. Do you use excessive credit? Have you paid off other loans? Can you handle additional debt or will it become a burden?

After looking at your collateral, capacity, and credit, the loan officer will make a determination whether or not you will get the loan. The better your collateral (the lower the loan amount is to the estimate of the collateral the better), the greater your capacity (earnings exceed expenses), and the wise use of credit in the past will all work favorably toward you being accepted for a loan.

If you have specific questions, you should talk directly to a banker; each financial institution will have different parameters for approving loans. But by knowing what a lender looks for in general can show you areas that you need to address before applying for a loan, and whether it is the right time for you to be applying for a loan. It will also help you be prepared to answer any specific questions a lender might ask.