Underwriting - What is underwriting?

Underwriting refers to the process that individuals or banks go through to assess the creditworthiness of a potential borrower and decide whether the risk is worthwhile

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An underwriter, as the bank or individual, goes through a systematic process to determine the risk of lending to a potential borrower. This risk is how likely the borrower will be to actually pay back the loan based on a specific set of information.

Underwriting is also an important part of determining the borrowing rates, in the event that the loan is approved and provided.

Underwriting is also part of the process when applying for insurance and evaluating the risk of insuring the candidate.

How underwriting works

When an individual or company applies for a loan, underwriting is essentially the process of assessing whether that person should receive the loan and at what rates. It is a thorough and detailed process that takes into account a range of information, designed to give the underwriter a clear picture of the risk involved in lending the money.

Information needed in underwriting process

Information that is used in the underwriting process for an individual includes:

• Creditworthiness (credit history)
• Salary
• Employment history
• Savings
• Current debts
• Investments
• Residence information
• Identification (government issued)

Once this information is all provided by the applicant, the underwriter goes through the process of verification. This can be done either manually, or more often today, electronically.

Loan underwriting for individuals generally involves a mortgage. In this case, the next step would be an evaluation of the property to determine that the loan is an appropriate amount (for example, not more than the worth of the property).

Details needed in underwriting for a business

When underwriting is initiated for a commercial loan, the following information is gathered:

• Balance sheet
• Net worth of the company
• The ratio of debt to worth
• The current liquidity

Understanding this process and the information necessary can be important for businesses when it comes to getting approval.

How long underwriting takes

The amount of time that underwriting takes can depend on a number of different factors. Primarily, how busy the underwriter is - for example if a bank is assessing many loan applications, this can take up to 45 days.

However, technology has generally served to make this a much faster process. Depending therefore on individual details and factors, the decision process can be completed almost instantaneously, or over a matter of minutes or hours. Most underwriters cite one week as the processing time.