Underwriting Decision Framework and Guidelines

Underwriting evaluates four pillars. Credit: the borrower's credit history, score (minimum 620 for conventional, often 660+ for investment properties), and derogatory items (late payments, collections, bankruptcies, foreclosures). Capacity: the borrower's ability to repay—measured by debt-to-income ratio (DTI). For investment properties, rental income is added to the borrower's income at 75% of the gross rent (to account for vacancies and expenses). Typical maximum DTI: 43-50%. Collateral: the property's value and condition, verified by the appraisal. The loan-to-value ratio (LTV) determines how much the lender will lend relative to the appraised value—typically 75-80% for investment properties. Capital: the borrower's financial reserves—lenders require 6-12 months of mortgage payments in liquid reserves for investment properties.

Investment properties face stricter underwriting than primary residences. Interest rates are typically 0.5-1.5% higher. Down payment requirements are 20-25% minimum (vs. 3-5% for primary residences). Reserve requirements are 6-12 months of PITIA (principal, interest, taxes, insurance, and association dues) per property. Number-of-properties limits: most conventional lenders cap investment properties at 4-10 per borrower. Rental income credit: only 75% of documented rental income is credited toward qualifying income. Entity ownership adds complexity: some lenders require personal guarantees when the borrower entity is an LLC. DSCR loans bypass personal income qualification entirely—the property must generate a DSCR of 1.0-1.25 (net operating income divided by annual debt service).

Most underwriting decisions are conditional approvals—the loan is approved subject to satisfying specific conditions. Conditions fall into two categories: prior-to-documents (PTD) conditions must be cleared before closing documents are prepared, and prior-to-funding (PTF) conditions must be cleared before the loan is funded. Common conditions include: updated pay stubs, bank statements showing the source of large deposits, letters of explanation for credit inquiries or derogatory items, additional appraisal documentation, and insurance binder confirmation. The key to clearing conditions quickly: respond within 24 hours, provide exactly what is requested (no more, no less), and ask the underwriter to confirm each condition is cleared before submitting the next one.