Every bank, lender and mortgage company has its own set of underwriting guidelines. Underwriting guidelines are the rules and regulations that the lender uses to decide whether or not it wants to grant a loan to the borrower that has applied. If the lender is processing an FHA loan or a conventional loan, they have to follow the underwriting guidelines for conventional loans. When lenders are using their own lending programs they can abide by their own set of underwriting guidelines, which tend to be less stringent.

Factors of Underwriting Guidelines

Several different factors go into the underwriting process. Your loan file goes to the underwriter for review once your loan officer has worked with you to put all of the information together to present the best case possible—to make you look as creditworthy as possible—so that you can receive approval on the loan.

Underwriting factors include:

• Income
• Debt
• Credit History
• Savings
• Debt-to-Income Ratio (DTI)

This is the information the  underwriter uses to compare to the guidelines for the loan. Applicants that meet these guidelines receive approval. Those who do not are denied, or have to make changes where necessary to meet the underwriting guidelines.

1. Income

One of the first guidelines that the underwriter considers is the total income of the borrower. The lender wants to ensure the borrower has enough income to repay the loan or mortgage. Underwriting guidelines tend to take various types of income into consideration including:

• Salary/wages
• Commissions
• Bonuses
• Retirement income
• Social Security income
• Investment income
• Rental income
• Alimony
• Child support

An underwriter not only looks at the amount of income, but also the stability or constancy of that income. If it is employment income, the underwriter also considers the length of employment or the length of time the borrower has been working in the industry. In essence, the underwriter wants to make sure that the income is long-term and ongoing before they use it as a means to qualify you for the loan.

2. Debt

After income, the underwriting guidelines focus on the amount of outstanding debt you have. Underwriting guidelines do not typically include standard living expenses, such as the amount of your grocery bill, your utilities or your car insurance. The guidelines focus on installment loans and debt such as auto loans, student loans, credit cards and other revolving lines of credit. The debt will also include the housing payment, insurance and taxes that you will incur once you are the owner of the home you are applying to buy.

3. Credit History

Credit history is incredibly important and even more so now that the housing and lending market almost came to a crashing halt during the recession. Underwriters are looking for a high credit score, which according to USAA is now 760 or higher. Paying your bills on time is one of the primary components that adds to your credit score, but underwriters are also looking for bankruptcies, collections accounts, consistent late payments and other negative items on your credit report, which indicate that you may not be responsible in repaying this loan either.

4. Reserves

Buying a home requires borrowers to have more money than the income to make the mortgage payments on the home. Most underwriting guidelines require borrowers to have cash savings, also referred to as reserves, to cover costs such as a down payment, the closing costs and pre-paids involved in establishing a mortgage.

Acceptable reserves include:

• Checking and savings accounts
• Retirement accounts
• Secured loans (such as an equity line of credit or equity loan)
• Assets that can be sold to create cash
• Cash from the sale of a previous home or piece of real estate

5. Debt-to-Income Ratio (DTI)

The loan officer compiles all of this information, and the complete file  goes to the underwriter. One of the ways the underwriter will determine if you’re eligible for the loan is by calculating your debt-to-income ratio. Conventional loans have lower DTIs than unconventional loans, which means that you have to have less debt than income to qualify for a conventional loan. Generally, underwriters do not like to see that your debt is more than 38% to 40% of your total income.

Underwriting guidelines are the rules and regulations that lenders use to qualify borrowers for a mortgage or loan. The specific underwriting guidelines vary slightly from lender to lender, but overall, all lenders are considering the same factors: income, debt, credit history, reserves and DTI.