What Is Underwriting?

What Is Underwriting?

At its core, underwriting is about estimating how much risk one entity will take on if it works with another, and what price will make that risk worthwhile. During loan underwriting, a lender looks closely at all the data the applicant has provided to understand how much of a risk it might be to lend them money.

When the lender has decided it's too risky, they'll deny the applicant; when the eligibility requirements have been met, the lender will issue an approval. If the applicant is on the edge, they might be approved, but under the conditions of a higher interest rate or other terms that mitigate the risk the lender could lose money on the loan.

Learn more: How Long Does It Take to Get a Personal Loan?

Types of Underwriting

Underwriting doesn't only take place as part of the lending process. There are other circumstances when an institution may want to determine the risk of engaging with a potential customer. Here are the three types of underwriting:

Loan Underwriting

When you apply for a loan such as a mortgage, a certified underwriter employed by the lender will look at various factors in your application, including your credit history, debt-to-income ratio (DTI), income, savings and available down payment. It will compare these with the loan's requirements and determine if you're eligible to borrow. Underwriting further helps lenders identify the terms of the loan they're willing to take on, including the loan amount and interest rate.

Insurance Underwriting

Insurance underwriting takes place when an insurance company evaluates the risk that it will have to step in to cover an eligible event for a potential customer, such as a car accident or health issue. Underwriting then gives the company the information it needs to assign a premium and coverage amount to the customer according to their risk profile.

Securities Underwriting

Securities underwriting is when an underwriter helps a client, such as a company or government, raise money by selling stocks or bonds to investors. It involves deciding when, how and at what price to offer the sale of securities to give the client the best shot at raising the capital it needs.

How Does Underwriting Work?

Loan underwriting takes place after the borrower has submitted a final loan application to the lender. The underwriter will look at the application along with the applicant's credit report and employment and income information, and request any additional documentation they need. If you're self-employed, that might include tax returns, a profit and loss statement and business bank statements.

The underwriter will review all documents to determine if you are financially capable of repaying the loan, and that your credit history shows you're likely to make payments on time.

It's important to respond quickly to any questions or requests for clarifications from the underwriter or lender. When underwriting is over, you'll find out whether your application has been approved or denied, and what your loan amount and interest rate will be.

The process can take up to one to two months for mortgages, but can be as quick as a few minutes in the case of personal loans, especially if you apply online.

Manual vs. Automated Underwriting

There are two types of underwriting: manual and automated.

Automated underwriting is when an algorithm evaluates an applicant's materials to determine if they qualify for a loan. It's quick and makes it possible to have a fully digital loan application, but it doesn't allow for a lot of flexibility or explanation of negative marks in an applicant's credit history.

By contrast, manual underwriting is performed by a person who looks through your application and supporting documents by hand to determine if you qualify for a loan. You'll likely need to provide more information to the lender during manual underwriting. It is particularly useful when your circumstances would otherwise make it difficult to qualify for a loan, such as when you have limited or negative credit history or a high DTI. A slower, more thorough review can help a lender determine your eligibility using nontraditional data such as proof of timely payments on insurance, rent and utilities, for example.

Learn more: What Is Manual Underwriting?

Tips for the Underwriting Process

To make the underwriting process go as smoothly as possible, follow these guidelines:

• Don't add to your debt or take on new credit accounts: While your loan is being underwritten, avoid increasing debt balances or applying for new lines of credit. Changes to your credit score or DTI during the process—which, when applying for a mortgage, could be long—could negatively affect your chances of getting a loan.
• Respond quickly: Whenever a lender or underwriter reaches out with questions about your application, such as a request for new documents or explanations for inconsistencies, respond as soon as possible. It's normal to receive follow-up questions, and answering quickly and thoroughly will help move the process along.
• Be proactive: Let other people involved, like your employer, know that the underwriter may get in touch with them to verify data you've provided so they're ready. Check in about the status of the underwriting process regularly and make yourself available to answer questions if necessary.
• Strengthen your credit: Since your credit score and payment history are integral contributors to loan eligibility, do your best to improve your credit before applying. Pay down debt, set up autopay so you don't miss payments and check your FICO^® Score^Θ regularly to stay on top of any irregularities or issues to address.

Frequently Asked Questions

The Bottom Line

Loan underwriting is the process of evaluating an applicant's suitability for a loan. It can be quick and uncomplicated in the case of an online application from a borrower with excellent credit, or long and detailed in a more complex situation, such as when an applicant is self-employed or has credit challenges. While underwriting may seem mysterious, approaching it with diligence, confidence and care can shorten the process and make it more manageable.