Mortgage Underwriting - From The Underwriter's Point of View

opinions4u

In a previous life I used to underwrite mortgages and have been asked in a PM to share my thought processes when making lending decisions.

Having replied to the PM, I thought I would post the detail here as well.

This should be read in the following context:

- I was working for a mianstream high street lender (different lenders will view things in different ways)
- this was some time ago, and the world may have moved on a little

A handful of cases where the customers had known debt problems did go through because of specific circumstances that made the cases worth doing (e.g. the borrower had an exisitng mortgage with my employer and by moving it to a new property it wasn't placing the lender in a worse position, despite CCJs etc leaping out!).

Basics:

- how much deposit - Minimum deposit = look very carefully at everything. Anything over 25% deposit meant fewer checks. That figure is very possibly 40% today.

- income multiples - If the case was close to the maximum income multiple allowed then look at everything very carefully. If it was less than 2 times income don't worry too much. Very cautious with probationary periods, especially if the employment was different to the previous job.

- time in employment - Anything less than a year was looked at closely. Anything over 3 years wasn't worry about.

- self employment - could they be using the funds to inject in to a struggling business? is the company net profit stable or growing? is the company's borrowing increasing? what has the owner withdrawn by way of capital / income from the business and could this potentially undermine the business. Are the accounts presented in a logical way, or has the accountant tried to confuse me as a lender? - this could suggest it's a second set of accounts, not the ones presented to HMRC. Requesting official HMRC documents usually unmasked this sort of fraud. Lending to the self employed isn't a problem. Lending to the self employed when the documentation doesn't stack up is.

- fraud - is the borrower who he says he is, does he earn what he says he earns (local restaurants are very good at saying a waiter earns exactly the amount needed to get a particular mortgage and the handwritten payslips don't look good! Asking for a P60 usually meant you never saw the applicant again).

- other commitments - does the customer live in overdraft, what was the size of the overdraft 6 months ago. Cash advances - are they common? Are credit card debts rising? Personal loans - too many or too big? Rising unsecured credit of any sort is a warning message. A warning message on its own isn't a reason to decline a case, but it is a reason to consider all the other information with extreme care.

- source of deposit - much better if the borrower has saved it rather than been gifted it from parents, or worse still - vendor! Did the customer take out a loan last month? If they did and are borrwing 95% and 4 times income after 6 months in a job where they live in their overdraft I'd be very wary about authorising the lending.

- location of property - does it fit with where the borrower works? Buying in Birmingham's student areas when you work in Stoke means you're really in this as a buy-to-let. Probably! Or is the property in a poor area where values are less likely to hold. Not on its own a reason to decline, but alongside other factors it could be no.

- condition of property - interpreting the valuation report. Where the borrowing is low LTV I didn't really worry about it needing repairs. High LTV for a FTB stretching themselves to the limit and also needing new windows and a DPC made be question how the customer was going to afford to maintain the mortgage payments and do the repairs necessary.

- credit file - is it clean? Has the borrower disclosed all the items that come out on the file? Failure to disclose could be genuine forgetfulness (I always forget the interest free suite loan I perpetually have) but it could also indicate lying. Where negative credit information is identified, what are the reasons? Does the explanation tie up? Any doubts around this usually meant automatic decline.

The easiest cases to underwrite:

- low LTV
- employment stability
- borrowing less than 3 times income
- little or no unsecured debt
- clean credit file
- property in a reasonable location for commute to work
- property in decent condition

If you're thinking of buying and can deliver on these points, you should have few difficulties raising the mortgage finance required. If you deliver on several (but not all) of these points you will probably be fine. If your credit file is patchy or you are struggling on several of these points I'd suggest finding a reputable whole of market mortgage adviser to help you through.

I've probably missed one or two things out! Just because a case isn't easy doesn't mean it would be dismised. I always looked for ways to justify the lending. Not to break the rules, but to find ways to comply with the rules.

Thanks for reading. Hope that helps.

_Andy_

Nice post - should be a sticky, very informative.

benjo

A really helpful insight into what happens in the decision making process - many thanks!

Radiantsoul

Very useful.
It would be good if someone who currently works in mortgage underwriting could comment on any recent changes!