What is underwriting?
Underwriting is the process that banks and other financial institutions use to assess the creditworthiness or risk of a potential borrower. During this stage of the loan process, the underwriter checks the borrower’s ability to repay the loan based on an analysis of their credit history, collateral, and capacity. Underwriting typically happens behind the scenes, but it is a crucial aspect of loan approvals.
When a borrower submits his loan application, he will work closely with his loan officer throughout the process. The loan officer takes information for the application, reviews the loan estimate with the borrower, and answers the borrower’s queries. When it comes to approving the loan application, however, the loan officer steps aside and submits the borrower’s loan package to the bank’s underwriter. In many cases, the borrower never sees or meets the underwriter. The underwriter plays a crucial role by ensuring the stability of the borrower’s financial profile and assessing his risk.
Example of underwriting
The underwriting process begins with information gathering, which starts when the applicant submits the initial request for a loan. Banks typically ask for personal information about the borrower’s identity, residential history, income, employment status, debts, and financial investments. They may also request copies of recent tax returns, credit report, bank statements, paychecks, and any government-issued identification.
All of the borrower’s information then goes through an official verification as the underwriting process enters the second phase. Such information can be verified manually by the underwriter, or electronically through computerized data systems. If the borrower has outstanding debt balances and payment histories, it can be verified by phone calls to the bank. Credit reports most likely will be checked for any indications of financial instability.
Once the borrower’s information is verified, the bank orders an appraisal of the property as well as an inspection. The appraisal ensures the bank that it is not lending out more money than the property’s current market value, and the inspection ensures that the property is in good condition. If the property appraises at a value lower than the agreed upon sale price, the seller may need to reduce the price in order for the buyer to secure the bank’s approval. Changes to the sale agreement should be done between the seller and buyer’s Realtors before the underwriting process can proceed. If the inspection turns up issues that lower the value of the property, such as roof and plumbing leaks, these issues may need to be resolved before the lender approves the loan.
The last step of the underwriting process is the analysis of the borrower’s information. Underwriters have to determine whether extending the loan makes solid financial sense from the bank’s perspective. A debt-to-income ratio analysis may be carried out, in addition to determining the percentage of the borrower’s gross monthly income that will be required to make the loan payment. If the bank decides that extending the loan makes sense to them, they will recommend approval for the application.
The length of the underwriting process varies depending on the bank. If the bank processes a lot of loan applications, the underwriting process can take as long as 45 days. However, if the borrower is working with a smaller bank, or if the bank doesn’t receive a lot of loan applications, it’s possible for a borrower to be approved for the loan in a short period of time.