The job of the underwriter is to look for all of the negatives in your mortgage application. He does this in order to fully evaluate your level of riskiness in regards to a mortgage loan. If you are the least bit risky, he is supposed to deny the loan. Because this large burden lies on the shoulders of the underwriter, it can make him seem like the “bad guy” or the person always bugging you for more information. In order to make your application as attractive as possible, you need to understand how to display compensating factors to make your situation look better, or less risky.
Compensating factors make up for the negatives in your mortgage application. Some of the negatives underwriters look at the hardest includes a sketchy residence history, skipping jobs throughout the years, late payments on your credit report and a lack of liquid reserves. Each of these issues can force an underwriter to decline your mortgage application. The only saving grace you would have, if any of these issues were apparent in your file, is positive factors to make up for it. These positive factors could be a steady income, good credit history, excessive reserves or a steady employment history. Each factor is looked at individually as well as a combination to determine the overall riskiness of your loan.
If your mortgage application includes some negative facts, you may be able to make up for them with a proper explanation. If there is one period of time that you have late payments, missed payments or less income and you have a legitimate reason, such as job loss or an illness, it may be overlooked. If you have more than one period where these issues occurred or you cannot prove there was something going on that was out of your control, those negative periods in your life will likely affect your ability to get a mortgage.
Watch out for Payment Shock
One of the largest reasons new homeowners default on their mortgage is due to payment shock. If your new mortgage is much higher than your current housing payment or you have never had a housing payment, you will need to show the ability to afford the mortgage no matter what happens. This means that you can prove excessive liquid reserves that are there when you need them. This is necessary because there is no guarantee that you will never lose your job or become ill, so the lender needs to see how you will continue to pay for the mortgage despite the high payment. If you cannot prove your ability to pay the mortgage in good times and in bad, the application is likely to be denied.
A Sketchy History
If you bounced from house to house or from job to job, you are not going to paint the picture of being a consistent person. The underwriter needs to see this consistency in order to trust your ability to take on a new mortgage for the next 30 years. In order to make up for the constant moving or changing jobs, you need to show a good credit history, adequate reserves and a low debt-to-income ratio. Of course, all three compensating factors would be ideal, but at least one of the three will be necessary in order for the underwriter to consider your file.
There is never a definite way to tell if a lender is going to approve your mortgage application, but the more compensating factors you provide, the more likely it is that you will get approved. If you cannot paint a picture of consistency, at the very least, try to show that you have the capability to pick the pieces up when things get bad. With adequate assets and a steady income, you can show your ability to be responsible and pay your obligations. If your credit, residence and job history paint a different picture, it might be best to wait until you can show more responsibility, giving the lender a reason to give you a mortgage.Click to See the Latest Mortgage Rates»