Areas and items considered in any mortgage approval process:

Monthly Housing Expenses and Total Debt Obligations - These are the primary things that underwriters determine and includes borrower's proposed monthly housing expenses and total monthly debt obligations.

Housing Expenses - Housing expenses typically include the monthly principal and interest payments stipulated on the mortgage note. In some occasions, monthly housing expenses may include a monthly amount for the property taxes and hazard insurance (1/12 of the annual taxes and insurance) and other expenses, such as condominium fees, homeowners’ fees, special assessments, etc.
 
Monthly Personal Debt Obligations - These include monthly credit obligations (installment payments, revolving charge cards, and other bills obligations that typically continue for more than 20 months). 5% of the current balance of a revolving charge account is usually used for the monthly payment.

Total Monthly Debt Obligations - Total monthly debt obligations include all monthly housing expenses and monthly debts, which you owe.

Monthly Income - This is the summation of incomes of borrowers and co-borrowers and is evaluated by historical documentation for likelihood of continuation.

Types of income that are approved by lenders:

Salary: Income derived from any kind of salary, (monthly, weekly, or hourly). Two-year employment history is usually required.

Commission and bonuses: These are nowadays approved sources of income. However, commissions and bonuses are averaged for the two preceding years of income as shown on federal income tax returns and the year-to-date earnings from the written verification of employment or pay stubs.

Self-employment: Underwriters calculate earnings through self-employment by averaging the income earned for the last two years. The data is taken from federal tax returns and the year-to-date earnings from a profit and loss statement on the business. Trends in businesses are also taken into account.

Other income sources: These include income derived from rental properties, interest, dividends, pensions and social security, etc.

Income-to-Debt Ratios - This ratio is calculated by summing up the monthly housing expenses and the total monthly debt obligations.

Primary Housing Expense/Income Ratio (front-end ratio) - Calculated by dividing the housing expenses for the proposed loan by the monthly income of the borrower(s).

For example:
Primary housing expenses $1,000
Total monthly income $4,000
The ratio will be 25% ($1,000 divided by $4,000 = 25%)

Total Obligations/Income Ratio (back end ratio)
This ratio is calculated by dividing the housing expenses for the proposed loan plus the borrower(s) other monthly credit obligations by the monthly income of the borrower(s).

The ratio would be 35% ($1,400 divided by $4,000 = 35%)
Qualifying ratios are only one component of the underwriting process and many other variables are considered in the final decision.

Funds to Close - Calculated by determining the source of funds for the down payment and closing costs when the proposed loan is being used to finance the purchase of a home.

Approved sources of funds for closing:

Cash: Cash lying with any depository institution or investment company is acceptable.
Stocks, bonds, mutual funds, etc: Cash equivalent investments are acceptable forms of funds and can be validated through statements from investment companies for the last two months.
Sale of existing property: Down payment on a home comes from the equity in a property that the buyer will be selling. In such a case, the sales price of the property being sold is indicated on the loan application and any existing loan is verified on the credit report or through a verification of previous mortgage.
Gift from family members: This is acceptable as long as there is no requirement for repayment. Some loan programs limit the amount of gift funds allowed.

Credit Analysis - This is done to determine the credit worthiness of the borrower. Underwriters review the borrower's credit report to find evidence of debt repayment behavior.

Important areas underwriters review for credit analysis:

Past and existing mortgage debt: This is a good indication of a borrowers’ attitude toward mortgage obligations. Payments received after 30 days past the due date are reflected in the credit report as late. However, lenders vary in strictness and some may not allow any late mortgage payments, while others will allow one or 2 in the last two years if there is a good explanation.

Installment and revolving credit: This includes other factors such as outstanding balance, current balance, and terms of payment on the borrower's revolving and installment debt, etc. Underwriters review these credit obligations to determine the borrower's patterns of credit use and repayment behavior. Installment credit encompasses longer-term credit with structured payment plans; such as car loans while revolving credit usually include department store and bank credit cards.

Collections, repossession, foreclosures, and bankruptcies: Underwriters sometimes demand a letter of explanation on problem items (late payments, etc) noted in the public records. Although such items may indicate past credit problems, they sometimes have valid explanations.

Underwriting of an Appraisal: Underwriters do not re-appraise a property but review the appraisal to assure that it meets the requirements of the investor. Underwriters may even request additional information to validate the value estimated and that a second appraisal or review appraisal be performed. However, in such a case, the review appraisal should be completed from a site inspection or review of the written appraisal.

Compensating Factors: Credit and income statuses of borrowers are varied and include a lot of variables, which is the reason why underwriters are forced to extensively study a borrowers credit history and other variables before approving. It may happen that a borrower does not qualify for a loan on initial analysis, but may have strong compensating factors that reflect low credit risk for the lender.

Final Closing

1. Approval
If the loan is "picture perfect" and the underwriter has no questions, the loan will be approved with no conditions.

2. Approval with conditions
This is the most common response and is associated with two types of conditional:

(a) In case the underwriter needs additional documentation before a final credit decision can be made, a "prior-to-document" conditional approval is forwarded. In this condition, the loan documents will be prepared only if the conditions have been satisfactorily met.

(b) If the loan can be approved, but a condition must be met prior to closing, a "prior to funding" conditional approval will be put forward. In this case, the loan documents will be prepared and sent to the closing agent, but the lender will not fund the loan until the condition has been met.
 
3. Suspended
The status lies suspended if the underwriter is unable to make a decision on a loan file because it is either incomplete or there are many unanswered questions. In such a case, the underwriter will ask for additional information from the borrower before an underwriting decision is made.

4. Denial
Loan underwriters may deny a loan if the loan file has substantial deficiencies and does not meet the minimum standards of the lender. If the lender's secondary market investors require a second underwriter review of the loan package before a final denial is communicated to the borrower then also the status can go to denial. Denial letters with the reason for denial are sent to borrowers within 3 days of the final credit decision.