Mortgage underwriting in the United States refers to the process by which a lending company determines whether the risk involved with lending money to an individual is acceptable. In other words, a mortgage underwriter analyzes the risk factor in offering a loan to a borrower and ultimately decides whether to approve or deny the loan request.

When determining whether or not a loan is an acceptable risk, underwriters generally, consider the three C’s of underwriting: credit, capacity and collateral.

Credit reports allow the underwriter to examine a borrower’s credit management. (This is why you have to complete a background and credit check prior to getting pre-approved for a mortgage.)

Capacity refers to the borrower’s ability to pay for the loan. To make sure the borrower is capable of making regular monthly payments, the underwriter will analyze his or her income, employment history, current debt and assets. Assets generally refer to the money in the borrower’s checking or savings accounts, retirement funds, or investments. Funds that carry penalties for early withdrawal, however, are considered on a much more conservative basis and are typically evaluated less than their actual value.

Collateral refers to the type and value of the property that the loan is representing. Single family residence, duplex, townhome, condominium are a few common property types. Each type carries a different amount of risk for lenders. For instance, in the event that the bank has to seize the property, a single family residence would be easier to resell than a duplex.

Occupancy is also factored in when it comes to collateral. Owner-occupied homes have the least amount of default, and therefore carry less risk. Second homes or investment properties have a higher rate of missed or late payments, so an underwriter may consider these to be more risky.

Modernly, many lending companies utilize automated underwriting, which streamlines the process and reduces the amount of documentation needed from the borrower. However, a mortgage underwriter still needs to evaluate the results of the automated data and will ultimately decide to approve or deny the loan.