Most of the factors that go into the underwriting approval process of a mortgage application are fairly straightforward—a first-time homebuyer can understand the basics of what is being assessed in their debt, income, and credit history. The debt-to-income ratio, however, is a unique instrument of the mortgage lender, and might not be as clear on the surface.

Underwriters review two different values to determine the debt-to-income ratio: a front-end percentage and a back-end percentage. The front-end refers to the amount of a prospective homebuyer’s income that goes towards their current housing costs (rent, current mortgage payments, condo assessments, and property insurance/taxes). The back-end refers to all debt payments for which the borrower is currently responsible, including the front-end percentage. These two percentages together create the borrower’s debt-to-income ratio, expressed as (front-end percentage) / (back-end percentage). By multiplying the borrower’s monthly income by each side of this ratio, the lender can determine what they can afford in a mortgage.

This ratio compared to the standard debt-to-income ratio. In the United States, the standard conforming loan ratio is 28/36 (signifying that the borrower should currently have 28% of their monthly income available for housing expenses and 36% for housing expense plus all other debt). For FHA-approved loans the ratio is 31/43, rural properties purchased with USDA loans are calculated with a debt-to-income ratio of 29/41, and Veterans Affairs loans are assessed on a single standard of 41 (meaning that the borrower must simply have 41% of their monthly income allowed towards all debt).

Although this ratio is a significant part of any mortgage application review, as with any application, the underwriter will be looking at the borrower’s entire financial situation. The general strategy for any hopeful borrower should be to reduce debt obligations and maintain a history of financial responsibility.

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The loan application is nothing without the review of an underwriter who lies at the heart of the mortgage approval process. The underwriter evaluates the application and the property side by side and then renders a final decision regarding the risk that the lender is considering. Underwriters accomplish this task by utilizing several different sets of guidelines, including those set up broadly throughout the industry nationwide. These regulations, as well as their own insights and experience, are all factored in to their final determination.

The underwriter’s primary job is to carefully scrutinize the potential borrower to assess whether they will be able to pay back the loan they receive within the time allotted. The clearest way to make this assessment is to review the borrower’s financial situation. Underwriters will examine:

- Debt obligations, including other loans, taxes owed, and credit cards. They will look at both the total amount owed and the current monthly payments being made.
- Monthly income, including all regular salaries, commissions, and self-employment income. This will also include money collected from investments, such as property.
- Funds available at closing; specifically, the amount that the borrower can contribute to the down payment from their own funds or from the sale of their current property.
- Credit rating, which gives a snapshot of how well the borrower has managed to maintain their debt in the past.
- Miscellaneous factors, such as job stability or responsible investment history, can also be considered in the final analysis.

Underwriters will render one of four decisions, based on the borrower’s request, history, and purported value of the home: they will either approve the loan, approve the loan with conditions, suspend judgment, or deny the loan. “Conditions” describe actions the borrower must complete prior to funding, such as completing and verifying the sale of their previous home.

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New homebuyers often have a lot to learn about the many moving parts of a property transaction—it’s usually not just a matter of handing over the money and receiving a deed. Besides the loan officer, attorneys, and various processing specialists, the buyer and seller may also need to engage the services of an escrow—a neutral third party who makes sure that the transfer of funds and property are handled in a timely and fair manner.

In real estate, escrow is used for two purposes, both before and after closing. After a real estate purchase agreement is signed by the buyer and seller, an escrow officer will be charged with collecting the buyer’s deposit as well as any documentation and contracts related to the purchase. This escrow officer may be from a licensed escrow or title company, and may be chosen by either the buyer or seller, per prior agreement (this agreement will also include deciding who pays the escrow fees, which may be about 1-2% of the home’s purchase price). The deposit, and any additional monies deposited by the buyer into the escrow account, will be used towards the price of purchase or to pay any contractors doing work related to the property. The escrow officer may also manage a number of “checkpoints” that either the buyer or seller must meet in order for the transaction to continue, such as a property inspection or the resolution of any easements or liens. If the deal falls through, the buyer will receive a refund of all money deposited into the escrow account. When the transaction officially closes, the escrow officer will release the money to the seller, and the title to the buyer.

After closing, a mortgage lender will often require that the borrower deposit into a new escrow account that collects payments for mortgage insurance and property taxes. The monthly escrow payment is calculated by dividing the expected annual cost of tax disbursements and insurance premiums by 12; this payment may be re-determined each year depending on changes in tax policy or insurance adjustments.

Escrow is used in certain housing markets more frequently than others, and individual states have different guidelines for how escrow is to be handled. The costs of using an escrow account may or may not be outweighed by its advantages and security features—the parties involved in the transaction will tend to decide that amongst themselves.

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