Monthly Housing Expenses and Total Debt Obligations: One of the first things an underwriter determines is the borrower's proposed monthly housing expenses and total monthly debt obligations.

• Housing expenses: These include the monthly principal and interest payments that are stipulated on the mortgage note. In addition, the monthly housing expenses include a monthly amount for the property taxes and hazard insurance (1/12 of the annual taxes and insurance). There may be other expenses, such as condominium fees, homeowners fees, special assessments, etc., that are included.
• Monthly debt obligations: These include monthly credit obligations, such as installment payments, revolving charge cards, or other borrower obligations that will continue longer than 10 months. Usually, 5% of the current balance of a revolving charge account is used for the monthly payment.
• Total monthly debt obligations: This combines the monthly housing expenses and monthly debt obligations.

• Salary: Income derived from any kind of salary, whether monthly, weekly or hourly is acceptable. Two year employment history is usually required.
• Commission and bonus: Commissions and bonuses can be used for income. The underwriter will average the last two years of income shown on federal income tax returns and the year-to-date earnings from the written verification of employment or paystubs.
• Self-employment income: Generally, the underwriter will average the income derived through self-employment for the last two years from the applicant's federal tax returns and the year-to-date earnings from a profit and loss statement on the business. Usually, underwriters will take into consideration the income trends in the business, as well.
• Other income: Other income can be used for loan qualification. Income derived from rental properties, interest, dividends, pensions, and social security can be used.

• Primary Housing Expense (PHE)/Income Ratio(I): This ratio is the result of dividing the housing expenses for the proposed loan by the monthly income of the borrower(s). For example, if the primary housing expenses are $1,000 and the total monthly income is $4,000, the ratio will be 25% ($1,000/$4,000 = 25%).
• Total Obligations (TO)/Income Ratio(I): This ratio is the result of dividing the housing expenses for the proposed loan plus the borrower(s) other monthly credit obligations by the monthly income of the borrower(s). For example, if the total obligations of the borrower is $1,400 ($1,000 for housing expenses and $400 for other credit obligations), the ratio would be 35% ($1,400/$4,000 = 35%).

Qualifying ratios are only one component of the underwriting process and many other variables are considered in the final decision. Ratios are used as guidelines and can frequently be much higher than guidelines.

Funds to Close: When the proposed loan is being used to finance the purchase of a home, underwriters will determine the source of funds for the down payment and closing costs. The following are acceptable sources of funds for closing:

• Cash: Cash in any depository institution or investment company is acceptable.
• Stocks, bonds, mutual funds, etc.: Cash equivalent investments are acceptable forms of funds. They can be validated through statements from investment companies for the last two months.
• Sale of existing property: Many times the source of funds for the down payment on a home comes from the equity in a property that will be sold. 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: Gifts from family members for the down payment and/or closing costs are acceptable so long as there is no requirement for repayment. Some loan programs limit the amount of gift funds allowed.

• Past and existing mortgage debt: The past repayment history on mortgage debt can be a good indication of a borrowers attitude toward mortgage obligations. A good payment history on mortgage debt is very important in the credit analysis. Generally, payments received 30 days past the due date are reflected in the credit report as late. Lenders vary in strictness, and some may not allow any late mortgage payments, while others will allow 1 or 2 in the last two years if there is a good explanation.
• Installment and revolving credit: Other items on the credit report can also indicate a borrower's attitude toward credit obligations. Credit reports indicate the outstanding balance, current balance, and terms of payment on the borrower's revolving and installment debt. Underwriters review these credit obligations to determine the borrower's patterns of credit use and repayment behavior. Revolving credit encompasses department store and bank credit cards. Installment credit encompasses longer term credit with structured payment plans, such as car loans. Generally, underwriters are not concerned over isolated and minor slow payments indicated on the credit report.
• Collections, repossession, foreclosures and bankruptcies: Credit reports also indicate public records such as collections, repossessions, foreclosures, and bankruptcies. Though these items may indicate past credit problems, they sometimes have valid explanations. Underwriters may require a letter of explanation on items noted in the public records. Many times consumers have re-established credit and have an excellent payment history on their current obligations.

Compensating Factors: The underwriters consider many variables in their analysis. No two borrowers have the same credit and income profiles and underwriters use all of the information in the loan file to render a decision. Many times, borrowers fall outside the guidelines, but have strong compensating factors that reflect low credit risk. Some compensating factors are history of savings, long-term job stability, history of making monthly credit payments that equal or exceed the proposed payments, a substantial down payment, or a large cash reserve after the close of escrow.