Underwriting is the decision process to determine if someone is eligible for a loan or not, including a mortgage, personal loan or credit card. If you are waiting for a loan decision, you may hear that your ‘loan is underwriting’ – and it is essentially the lender considering your application and deciding on whether to fund it or not. Good underwriters will request more information from you and they may decide to adjust your loan terms to manage their risk.
Key Features
- Underwriting is the process of your loan being considered and the lender is deciding to approve you or not
- Underwriting is a very important aspect of any loan enquiry that is not automated and requires some thought
- A mortgage and large personal loan will not be granted until the lender has completed the entire underwriting process.
- The lender mist verify all forms of income, credit scores, affordability property details and any potential debts to give the approval for a loan.
- It is possible that the lender would like access to additional documents (bank statements, wage slips) and proof of assets.
How Long Does Underwriting Take?
Underwriting can take anywhere from a few hours, to a few days or a few weeks. This will depend on the size and complexity of the loan. Personal loans can usually be completed in a matter of hours, unless they are large loans of $30,000, $50,000 or higher. Secured loans such as car loans and mortgages can take a few more days or weeks in order to verify your property or asset value. The underwriter will usually request more information from the application and the quicker they have all the required details, the quicker the overall process will be.
What is an Underwriter?
An underwriter is the person responsible for checking loan applications and deciding if they are approved or not. The underwriter will assess things such as income, loan amount, credit score and affordability to determine if a person is eligible or not. A lot of underwriting for loans and credit cards is automated, but for the more complex cases, there is an element of manual underwriting and certainly for large loans or mortgages, this is more likely to be processed by a human to make such an important decision.
The underwriter can also assist applicants in providing all of the correct documentation and ultimately helps the lender to make an informed decision on whether or not they will provide a loan.
The underwriter is working to ensure that no applicant is provided with a loan that they will be unable to afford.
They are in place to investigate the credit history of all applicants, pulling credit reports and assessing the overall score. They will be looking for any bankruptcies, late payments and overuse of credit to make an informed decision for the lender.
In addition to this, underwriters can order appraisal to ensure that the lender offers a mortgage which coincides with the actual value of the home the applicant is looking to purchase. The underwriter will also be required to verify all sources of income and employment alongside down payments and savings.
Savings are assessed to ensure that the applicant has enough to supplement their income or use as a down payment. The underwriter will also assess the applicant’s debt-to-income ratio.
This is a percentage which demonstrates how much money an applicant spends in comparison to how much they earn on a monthly basis. This means they can ensure the applicant will be able to take out the mortgage and still support themselves.
Underwriters will discuss all appraisals with you in advance of your mortgage payment
What Does The Underwriting Process Entail?
During the underwriting process, the underwriter will assess the following areas: income, credit, home appraisal and asset information.
The underwriter is required to assess income to ensure the applicant will be able to pay their mortgage on a monthly basis. In order to complete this, the applicant will be required to provide W-2s from the last two years, pay slips and bank statements.
If an applicant is self-employed, they will be required to provide different documentation. This can include some profit and loss sheets, balance sheets and tax returns.
The underwriter may also verify employment with an applicant’s employer. They will also be required to complete an appraisal, in order to ensure that both the lender and the applicant are protected.
This means that the lender only provides the applicant with the amount the home is actually worth. Completing the appraisal includes a full inspection of the property including taking measurements and images to see the condition of the home.
After this has taken place, the appraiser will compare the home with those sold in the same area in the last six months and are similar in size, location and style. If the comparisons do not match, the loan application may be suspended
An assessment of the applicant’s credit score will also take place. Credit scores demonstrate how responsible an applicant is with repaying debts and can help them to qualify for a lower interest rate. This is how an underwriter can assess the debt-to-income ratio and is therefore an important step in the process.
If an applicant does unfortunately default on payments, assets can be sold for cash. Consequently, an underwriter is also required to assess assets which can help an applicant qualify for a mortgage.
