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Learn About Personal Loans

What is Underwriting?

Female writing on paper with pen for underwriting

If you’ve ever applied for a loan, such as a mortgage or a personal loan, it’s safe to assume that you’ve heard your application will have to go through “underwriting.”

While this is a big part of the loan application process, it can be mysterious for the consumer.

Underwriting a loan can be complex, but the basic definition may be all you need in order to get in the right frame of mind to apply for a loan.

Generally speaking, underwriting is the process a lender uses to determine if the risk of offering a loan to a borrower is acceptable.

There are three possible outcomes:

  • The underwriter approves the loan, and the lender takes on the risk.
  • The underwriter could request additional information to help him or her make a more informed decision.
  • There are red flags, which could result in the denial of your application.

Although every lender has its own underwriting process, most focus on three primary concerns: capacity, collateral and credit (more on this below).

Underwriters may have a strict set of guidelines, that also may be accompanied by a computer model, to analyze the loan and the risks of lending money to the borrower.

The Process Differs by Loan Type

While the basic definition of underwriting remains the same from one type of loan to the next, the actual process can and will differ. For example, the process for underwriting a personal loan would not be identical to that for a mortgage.

In the case of a personal loan, underwriting involves the following:

Underwriting is also used in the insurance industry to analyze the risk of something happening to a home or a building. It can come into play in investment banking, for instance, when bankers are rolling out an initial public offering of a stock.

The mortgage underwriting process is among the most involved, and usually includes all of the following steps (among others):

  1. Review of your personal finances. This includes your capacity to make payments, collateral (which is not required for personal loans) and credit.
  2. Appraisal. The lender wants to know if the purchase price of the home is in line with the value of comparable properties in your area.
  3. Title search and insurance. A title company is responsible for reviewing the legal history of a property.

Compared to a mortgage, underwriting of a personal loan can be fairly simple if borrowers meet the lender’s criteria.

Your Role as a Borrower

Regardless of the loan type, you should remain part of the underwriting process from start to finish.

Let your lender know that you are available to answer questions and provide additional documentation if required. This can go a long way in pushing the process forward, while also decreasing the chance of a delay.

You may not need to understand all the details of the underwriting process, but knowing the basics will allow you to efficiently move forward one step at a time.

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