Jun 07, 2023

clock icon

Woman talking on the phone while using a tablet

Have you ever wondered what “underwriting” means in simple words? Underwriting is the process lenders use to assess your creditworthiness and determine whether to approve you for a loan.

To make sure you have the best underwriting experience possible, read this guide before you apply for a loan. You may even boost your chances of getting approved.

Here’s what you need to know about underwriting.

Table of contents

What does underwriting a loan mean?

If you have ever applied for a loan, you’ve probably heard that your application had to go through “underwriting.”

Underwriting is a big part of the personal loan application process. But because it happens in the background and it’s not a common word, it might seem a little mysterious.

The good news is you probably need only a basic understanding of personal loan underwriting:  Underwriting is the process a lender uses to determine how risky it is to lend to a borrower.

There are three possible outcomes to underwriting:

  • The underwriter approves the loan.
  • The underwriter asks for more information.
  • The underwriter denies the application because the borrower doesn’t meet the lending requirements.

Every lender has its own underwriting process, but most lenders focus on a few key factors: the borrower’s ability to repay the loan, the borrower’s collateral (if applicable to the loan type), and the borrower’s credit history.

Underwriters may use a strict set of criteria to come to an approval decision. That is, if a borrower doesn’t meet all the lender’s rules, the application will be rejected. Lenders will often use a computer model to help analyze the risks of lending money to a particular borrower.

What is personal loan underwriting?

The basic definition of underwriting is similar from one type of loan to the next. But the specific process can differ. For example, the process for underwriting a personal loan is not the same as for a mortgage.

For a personal loan, underwriting includes:

  • Examining the credit history of a borrower.
  • Weighing the creditworthiness of a borrower (that is, the risk of nonpayment).

What is mortgage underwriting?

The mortgage underwriting process is more complex. It often includes the following steps (and more):

  1. Verifying the borrower’s income and savings, collateral (which is not required for personal loans), and credit history.
  2. Assessing the borrower’s debt-to-income ratio (DTI). Your DTI tells lenders how much of your income is already dedicated to regular debt payments. Lenders want to know that you will have more than enough cash to pay your monthly mortgage payments, taxes, and insurance.
  3. Ordering an appraisal. The value of the home to be purchased will help the lender determine how much to lend.
  4. Searching the title. A title company will review the ownership status of the property and determine if there are any potential issues the lender should be aware of.

Compared to a mortgage, personal loan underwriting can be much simpler if you meet the lender’s criteria.

What is my role in the underwriting process?

It’s a good idea to take an active role in the underwriting process from start to finish, no matter what kind of loan you’re applying for.

Let your lender know that you are available to answer questions and provide more information if needed. This will keep the process moving and decrease the chance of delays.

Tips for a smooth underwriting experience

The underwriting process can sometimes be long and involved. But you can certainly make it go more smoothly. Here are five tips for a better underwriting experience.

Tip 1: Boost your creditworthiness

People with higher credit scores are more likely to be approved for a loan. They also may get lower interest rates. If you need to improve your credit score, pay down as much of your higher-interest debt as possible. A personal loan for debt consolidation could help you pay off debt faster and help you save money on interest.

Tip 2: Get your documents in order

You can speed up the underwriting process by gathering these documents and having them readily available:

  • Employment information and W-2s from the past two years
  • Pay stubs from two or three months before the date you apply
  • Income tax returns from the previous two or three years
  • Statements from checking, savings, and money market accounts
  • Information on certificates of deposit, retirement plans, and other investments

Tip 3: Don’t apply for any new credit or loans during underwriting

Big changes to your finances can cause problems during the underwriting process. To avoid any snags, don’t apply for new credit cards, loans, or lines of credit until after underwriting for your current loan application is complete. The same goes for making large purchases.

Tip 4: Respond quickly

Your lender is likely to ask for more information, no matter how well you have prepared. When you get these requests, gather everything you need as soon as you can. The process won’t move forward without these additional items.

Tip 5: Be honest

Be completely transparent about your income, debts, and any credit issues you may have had in the past. That way, you can explain any negative marks that might show up on your credit report.

The bottom line

You don’t need to understand all the details of the underwriting process. Now that you know the basics, you can move forward with your loan application one step at a time.

Thinking about applying for a personal loan? Our personal loan payment calculator makes it easy to estimate monthly payments based on loan amount and credit score.

Try Our Personal Loan Calculator

Articles may contain information from third parties. The inclusion of such information does not imply an affiliation with the bank or bank sponsorship, endorsement, or verification regarding the third party or information