Underwriting a Loan

What are lenders looking for in underwriting?

Underwriters are typically looking for 4 things when they see a loan(the 4 Cs):

Cash
Credit
Capacity
Collateral

Cash: How much does the borrower have in liquid assets? Bank accounts, stocks, bonds, etc. They basically want to know if the borrower has enough money in order to close the loan.

Credit: What is the borrower's credit history? This doesn't just have to do with the credit score. The lender will run a credit report, and the underwriter will check to see how the borrower makes payments(on time?) and how much debt that the borrower has.

Capacity: Is the borrower able to repay the loan? The lender looks at the borrower's Debt-to-Income ratio. First, they look at how much money (before taxes) a person makes per month. Then they look at the total amount of debts that person will have (including the mortgage). They will calculate this to show a debt to income ratio.

Example: Borrower makes $5000/month.
Borrower has debts of $3000/month.
This would make the person's debt-to-income ratio 60%.

The underwriter will look at this and say, "can this person live on the rest of that income for the rest of the month?" Remember, you have to then take out taxes, and these debts don't include the cost of living such as food, phone bill, cable, etc. If this doesn't make sense, the underwriter won't approve the loan. A good Debt-to-income ratio will be about 35-40%. If you are much above this, you may want to look at your budget and decide if this is the time that you should be buying a home.

Collateral: How much does the house appraise for? The lender wants to make sure that the worth of the house is enough to make up for the loan if the house goes into foreclosure.


It is in the borrower's control for the cash, capacity and credit, but the borrower doesn't have much control over the collateral part. Make sure that you are focusing on the first three to ensure that you will get a loan approved and you should most likely be approved for a loan!