The Prudent Underwriter: Ratio Analysis

Written By: Dionne Henderson

As Underwriters and other Mortgage Professionals, we must be able to provide a robust analyst of both individuals and companies to ascertain financial performance. There are several key aspects to review of each entity. First, the borrowers or companies financial management decisions must be critiqued. At the loan level, we review factors such as credit history and debt to income (DTI) ratios. For institutions, we also analyze key financial ratios, such as return on assets (ROA) and cash ratios. But what are financial ratios? And, why is their underlying meaning important in financial analysis? In this article we look at the core meaning of financial ratios and why being able to understand and articulate their underlying meaning is critical to loan analysis.

It seems a foregone conclusion, but there is no perfect transaction, borrower or piece of collateral. There is such a vast amount of drivers of potential default, it would be impossible to compare them all simultaneously to see which one aspect of the loan is weighed more. Therefore, ratios can be seen as a way of finding similarity amongst borrowers and transactions that are very different. Ratios allow different transactions to be compared equally.

For example: In one transaction, you may have a single person buying a condominium. In another, you may have two married persons buying a single family residence. If, as an Underwriter, you only have the ability to do one transaction, which one will you recommend for your Lender to approve? Which borrower or group of borrower has the best Ability to Repay your loan which translates into a lower chance of Loan Default? Ratios help make that decision. In this case, the single person has a very high debt to income ratio while the married couple is the reverse. Of course, the married couple is the choice. But, why?

That is the job of the prudent Underwriter: To be able to go beyond the superficial totality of the ratio and look at drivers of the result. Here are some tips on what to review:

  1. How was the ratio computed? Take the time to do a manual calculations. Depending on certain mortgage software platforms, some data or factors may be incorrect.

  2. What is the ratio intended to capture? Write up in your analysis why the ratio impacts the transaction, either positively or negatively. This transparency will help in repurchase or audit situations.

  3. How is a high or low ratio potentially misleading? Especially when manually underwriting loans, one of the largest compensating factors is that the Borrower used to carrying this type and amount of debt based on historically records. Don’t be afraid to challenge the ratio based on your analysis.

  4. Is there potential for the ratio to be improved? Or, for it to degrade suddenly? In transactions with a lot of deferred debt, such as student loans, high ratios combined with impending payment shock may not be favorable for the long term viability of the Borrower. Conversely, Borrowers with increased earning potential, or income not being used to qualify, but still verified, are great compensating factors.

In summary, since every borrower is different, ratios allow a common comparison of transactions. However, advanced Underwriters will take their analysis beyond the numbers to validate the drivers of the ratios and make a better loan decision. 

About The Author

Dionne Henderson -  As an NAMP® staff writer, she has over twenty years’ experience in finance, including residential and commercial lending, compliance, audit, banking, strategy, sales and customer service. She is instrumental in closing and auditing high value and high volume transactions. Her strengths include frontline, repurchase and commercial underwriting. She is versed in valuation and managing complex transactions. Dionne enjoys fostering business relationships and building mutually beneficial alliances. She is an inspirational public speaker. Her passions are teaching and training. If you're interested in becoming a writer for NAMP®, please email us at:


Opinion-Editorial (Op-Ed) Disclaimer For NAMP® Library Articles: The views and opinions expressed in the NAMP® Library articles are those of the authors and do not necessarily reflect any official NAMP® policy or position. Examples of analysis performed within this article are only examples. They should not be utilized in real-world application as they are based only on very limited and dated open source information. Assumptions made within the analysis are not reflective of the position of NAMP®. Nothing contained in this article should be considered legal advice.