Underwriting is an important step in the Mortgage Origination process which determines whether an applicant will be granted a loan or not. Any application is thoroughly verified and validated to evaluate the risk a borrower poses to the lender. Essentially, the underwriter has to carefully examine if the borrower can repay the mortgage. We have discussed the underwriting process and ways to improve it in an earlier blog. In this blog, we will discuss the 4Cs of Mortgage, which are the key factors for a mortgage decision.
Equal Borrowing Opportunity
Before diving into the 4Cs, we need to understand how mortgage equity is ensured by law in the US. Two acts have been created by the US Government for this purpose.
- Equal Credit Opportunities Act (ECOA) – This was enacted in 1974. ECOA makes it illegal for any lender to discriminate against any applicant based on race, color, religion, national origin, sex, marital status, or age. If an individual is creditworthy, a mortgage should be equally available to them.
- The Fair Housing Act (FHAct) – This act prohibits discrimination against individuals in case of any residential realestate transaction such as loans, purchase, selling, renting, brokering, or appraising.
Now that we have discussed that all individuals deserve an equal opportunity at securing a mortgage, it is important to discuss the factors that ultimately decide whether an applicant will be granted a loan or not.
Image 1: Standard Logo used by Lenders and Housing Providers
The 4Cs and impact of Technology
The 4Cs of mortgage have been around for a long time, with underwriters depending on these factors for denying or granting loans. Innovation in financial services has made it possible to utilize technology for underwriting and make the process more reliable and efficient. Let’s look at the 4Cs one by one.
Image 2: The 4Cs and impact of Technology
The repayment ability of a borrower is assessed by looking at their payment trends. Payment history, cumulative unpaid debt, revolving credit, and other factors are analyzed to allocate a credit score that reflects the buyer's potential payment probability. Borrowers with a decent credit history are often given lower interest rates than those with lower credit scores. During the initial stages of a loan application, a loan officer usually conducts a credit check to determine possible problems based on the credit report.
With technology and mortgage origination platforms like inflooens, it is possible to automate credit checks. Based on the identification information provided by the applicant, the system can automatically check their financial history and provide a credit score. Lenders can set parameters for application rejection and customize the platform according to their needs. Mortgage Loan Officers and Underwriters need only intervene in specific cases that can be flagged by the system. This makes the underwriting process convenient and superior.
To evaluate the capacity of an applicant, the borrower's current income is compared to their expected debt. This factor decides whether or not the borrower will be able to repay the loan. Lenders use two ratios to determine a borrower's capacity: the Housing Ratio and the Debt Ratio. Underwriters look at the client's debt-and-income ratio to see how they can keep up with the payments on a regular basis. The borrower’s employment and the time they have been in their current jobs are also important factors under consideration.
inflooens is a reliable and efficient mortgage origination platform that provides information at your fingertips. It uses advanced technology to display relevant information about borrowers, including calculations like the housing ratio and debt ratio. With intuitive and interactive dashboards, underwriters and mortgage loan officers get a 360-degree view of their customers to make informed choices about mortgage applications.
The borrower's assets are taken into account in this component of the 4Cs. Cash in reserve and cash in trade are scrutinized by underwriters. They even look at bank statements to see where the closing funds will come from. Borrowers can use gifts as a down payment as long as they have a clear paper trail to back up their claim. They must also keep track of all big deposits into their accounts. The origin of large amounts of money needs to be disclosed to the loan officer. The underwriter examines the assets to ensure that you have enough money to cover the down payment, loan fees, closing costs, escrow, impounds, rainy day funds, and moving expenses.
inflooens makes it possible to easily record this information for all applicants and make it available to underwriters or loan officers whenever they need it. With a discoverable and easy-to-use user interface and a reliable platform performance, the chances of loss of data are negligible. In conventional systems, borrowers may need to provide paperwork many times at different stages of the mortgage origination process. inflooens ensures that the process is up-to-date and integrated so that there is a single source of truth for all applicant data which is error-free and accessible.
Collateral, also known as a home valuation, considers a variety of variables before assigning a value to a house. The location of the property, its size, the condition of the house, the cost of restoring it, and the cost of comparable homes are all factors to consider. The aim of a lender is not to foreclose on the house, but to provide protection that can be used to safeguard the loan if the buyer defaults. The buyer may want a house that the investor is not keen on regardless of credit, capacity, or capital.
With mortgage origination platforms like inflooens, the lender can circulate guidelines and directions for mortgage loan officers and underwriters. These can be customized as per local market needs based on the age of the property, area or location, and potential appreciation of the house. Such information can be shared instantaneously across all markets to make sure that everyone involved in the lending process from underwriters to field mortgage loan officers have information at their fingertips.