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How Do Underwriters Help Lenders Avoid Foreclosures?

Underwriters take up the critical task of assessing whether the borrower is eligible to take up a mortgage loan. They play a major role in deciding whether a borrower’s loan application is approved or not. This responsibility of loan underwriting is one of the most significant ones since, any mistake in verifying the necessary documents submitted by the borrower can lead the mortgage business to run into losses. Thus, the underwriter needs to have a keen eye for detail and carefully double check the borrower’s financial documents, history of delinquency etc. Once the loan is approved, the borrower must be capable to make the loan payments to the lender in a timely manner. Delays or failing to pay the loan payments would put the lender at a high risk. To avoid foreclosures, loan underwriter’s asses loan applications in the following ways:

  • Assessing The Risk Factors

During loan underwriting, underwriters thoroughly assess the risk factors in the loan application submitted by the borrower. They look into the borrower̵

7;s income, expenditures, professional experience, employment domain, current and history of employment status and such. This is to ensure that the borrower has a steady income throughout their previous professional endeavors and also has a history of spending finances rationally with minimal or no debt. The borrower must have also had long-term employment histories to make sure that their professional employment credentials remain consistent in the submitted financial documents. All of these factors give a better insight into the borrower’s income-to-debt ratio, maximum loan-to-value, employment gaps, nature of their expenses etc. Through these insights, the underwriter can gauge whether the mortgage loan applicant is a high risk candidate for their mortgage business or not.

  • Analyzing Credit Information

Looking into whether the loan applicant has cleared their credit bills and debts without delay can help the underwriters decide their potential to pay off the mortgage loan successfully. The borrowers credit history will show whether they have had instances of failing to pay their previous committed debts leading to instances of delinquency. To avoid future situations of bankruptcy or foreclosures, underwriters thoroughly assess the loan applicants credit score, tax returns and financial reserves to finally decide their loan application approval. Those loan applicants with an unhealthy credit score will not be able to secure loan approval, since they would pose as high risk investment for the lenders.

  • Reviewing Financial Documents

Bank statements give away all the required information for the underwriters to understand the loan applicant’s spending habits. Reckless spenders or those who spend on gambling can be traced by analyzing the financial documents. These statements also give information about financial transactions where the loan applicant has borrowed money from their family, friends and colleagues showing signs of financial instability. This is an important step since, approving mortgage loan to a person who spends irrationally would increase the possibilities of the lender incurring losses. Those who spend without saving would not be able to stay committed to pay off their debts within set deadlines. Thus, those candidates with high spending, gambling, borrowing and low saving habits would be flagged by the underwriters as high risk applicants.

During the mortgage loan underwriting process, the underwriters determine whether the applicant’s loan is approved based on the above factors. They are the ones that decide whether or not to trust the borrower with the mortgage loan. Any error in assessing the loan application can lead to foreclosure. Therefore, it can be safe said that loan underwriting process in general and underwriters in particular help lenders avoid foreclosures.