As a homeowner, mortgage applicant, future homeowner, or credit-active consumer, your right to know what factors go into the decision of approving or rejecting your application for credit will empower you to proactively improve your credit worthiness. If you’ve ever been rejected for a loan, you may have wondered exactly why you were rejected, and would like to have known what steps you could have taken to improve your chances for obtaining a loan in the future. With Fannie Mae’s new underwriting system this knowledge will be right at your fingertips.

Underwriting is the process of evaluation that helps the lender decide whether or not to grant you the loan. This process also dictates how much money you are eligible to borrow and the interest rates of the loan.

As an informed consumer, knowing what factors are used in this evaluation process can help you to ensure that your finances reflect your maximum borrowing potential.

Fannie Mae’s Desktop Underwriter

Fannie Mae has developed software called the Desktop Underwriter, which is a computer calculated scoring system. This system simplifies the evaluation process by utilizing a consistent model of acquiring borrower information and objectively calculating the results via the computer. Fannie Mae is currently using this software to evaluate loan applications, and is also making the software available for other lenders to use in the evaluation process.

Fannie Mae has implemented what they call a “full disclosure” policy regarding this software. The guidelines for this policy provide that every factor used in determining credit worthiness will be disclosed along with particular information as to what problems with your specific application served to decrease your credit score.

Fannie Mae calls this an open book scoring system, and encourages other lenders to use the software so borrowers can be aware of factors affecting the outcome of their loan application before they apply. According to Chairman and CEO Franklin Raines, the three most important factors used in the software evaluation are equity, credit history and liquid reserves. Listed below are ALL of the factors that are used in the underwriting system as stated by the Chairman and CEO of Fannie Mae:

• Equity—How much is the borrower investing in the deal?
• Credit history—How timely have the borrowers payments been in the past?
• Liquid reserves—Does the borrower have a financial cushion?
• Debt-to-income ratios—Does the borrower owe more money now than s/he is earning?
• Salaried versus self-employed—Is the borrower receiving consistent and reliable income?
• Loan amortization period—Number of months on which monthly payments are based. Will the minimal payments be sufficient to cover principal and interest in order to reduce the debt at a reasonable rate?
• Adjustable or balloon mortgage—The different terms of these separate types of mortgages can affect lenders’ decisions. Will the borrower have the money to pay the balloon mortgage in full at the end of the term? Will the borrower’s income most likely increase over the term of a mortgage with adjustable rates?
• Number of units—The total number of dwelling units in the property.
• Co-op, condo or attached—Will the borrower solely own the property or jointly own with an individual or corporation?
• Funds from other parties—What other reliable income will the borrower be receiving?
• Loan purpose—What exactly is the loan going to cover? (I.e., purchase of a home, renovations, etc.)
• Number of borrowers—Who will be responsible for repaying the loan?
• Prior bankruptcies and foreclosures—Has the borrower declared bankruptcy or has a bank been forced to sell a house due to the borrower’s inability to make payments?
• Prior mortgage delinquencies—Has the borrower had trouble meeting mortgage obligations in the past?

Knowing the Specifics for Improving Your Credit Worthiness

While this information is beneficial, you may still wonder how you can better understand the outcome of your mortgage application and how you can improve your credit status. Fannie Mae addresses this issue by not only providing lenders with the factors that went into the decision, but also by identifying the factors that presented a problem for rejected applications and explaining why those specific factors decreased the applicant’s eligibility.