What is the Underwriting Process?

What does buying a home, vehicle, or business have in common? Most buyers need a loan, which means they must go through a series of processes to get approved. 

The most comprehensive is the underwriting process. 

It takes a lot of work for both the borrower and underwriter to make it to a happy ending. Fortunately, there are tools to make the process easier and faster for everyone. 

Let’s explore the underwriting process and how you can improve it. 

What is underwriting?

Underwriting is when a lender verifies whether a borrower qualifies for a loan or credit and gives them the final approval for it.

Once a loan officer reviews the borrower’s application, they’ll send it to the underwriting team, which assesses their eligibility for the loan. During the process, an underwriter closely scrutinizes the borrower’s actual loan application to verify whether they’re likely to repay the loan.

As a lender, you’ll go through, review, and confirm the information in the financial documents provided by the borrower before issuing a final decision. You might even request additional documentation or answers regarding their current financial situation to ensure they meet the specific criteria for the loan.

How does the underwriting process work?

Loan underwriters use the information provided on loan applications to asses risk levels and evaluate their chances of securing the money. If the financial risk fits your company’s underwriting guidelines, you’ll approve the loan. If not, you can suspend it and request additional documents or deny the loan altogether.

There are two ways to underwrite loan applications: manual or automated underwriting.

Manual underwriting

A human underwriter reviews the loan applications using supporting documentation to determine if the borrower can afford to repay the loan.

Manual underwriting works best where the borrower is new to credit or has no credit history (and therefore doesn’t have a long credit history to assess), but means the applicant has to provide proper documentation before getting a response.

Automated underwriting

The automated method uses preset computer programs like Fannie Mae. It has certain rules and guidelines to process documents, which allow automatic loan application approvals (if it passes the criteria). 

The borrower still must provide additional documentation for the underwriter to verify and make a provisional underwriting decision. The software uses algorithms to determine your eligibility and degree of risk, making it faster than manual underwriting and ideal for large volumes of loan requests.

Sometimes, a computer algorithm can't handle it all. In such cases, you can use a combination of manual and automated underwriting to determine the borrower's eligibility for the loan based on their financial status, credit report, and loan type.

What does an underwriter do?

A loan underwriter decides whether borrowers qualify for the loans they seek. If they review the applicant’s financial history, they can tell they’re a good candidate based on how they handle money. But they still have to be sure the borrower can repay the loan.

Underwriters work with loan processors or officers for a smooth underwriting process. The loan officer provides information to the underwriter who uses the borrower’s financial records to give their unbiased opinion, or make an informed decision on whether to approve, suspend, or deny their application.

Specifically, loan officers are the borrower’s main point of contact at your lending institution. They handle everything from marketing your company and loan products to the public, to working with customers to get loan approval and closure.

The underwriters’ decisions are heavily regarded. They answer to many stakeholders, including the public, who want to know that your institution’s credit decisions are thorough and unbiased. So, they must ensure the borrower has:

• A good reputation and history
• Good book of business
• Quality loans

What do underwriters evaluate?

Financial underwriting differs from life insurance underwriting. The latter uses medical history to determine if the insurance policy applicant can get coverage, how much, and at what cost. Lenders examine the applicant’s financials to determine how much risk they’re taking on and the losses they’re likely to incur.

Underwriters look at the borrower’s available data, which includes:

• Credit score or history: Sign of the borrower’s ability to repay the loan and affects the interest rate you’ll give.
• Income: Borrowers must provide pay stubs or recent proof of income to show they have a stable income.
• Debt-to-income ratio (DTI): Comparison of the borrower’s monthly debt obligations to their monthly income. The ratio allowed varies from lender to lender.
• Employment history: Verifies the borrower’s employment status—including remote workers.
• Asset value: Underwriters review the value of any collateral the borrower uses in their application.
• Appraisal: If the borrower wants a mortgage loan, the underwriter will check whether the property appraises for at least as much as the loan amount.

When evaluating a borrower’s loan application, underwriters look at several factors that determine whether they qualify for the loan.

Typical documentation underwriters review include:

• Bank statements
• Pay stubs
• Tax returns
• Contracts related to the purchase
• Utility bills (gas, water, electricity, telephone services, internet, or TV)
• Checking or savings account deposit history
• Housing payments (like rent)
• Motor Vehicle insurance payments
• Cell phone payments
• Life insurance policies
• Other payments (child care, school tuition, medical bills, etc.)

Potential outcomes of the underwriting process

Sometimes, underwriters require a borrower to submit additional documentation, like letters that document gifts received to help with the deposit and closing costs, or letters to explain employment gaps.

Once they have all the information, the underwriter will give the results of their evaluation, which can be:

• Approval: Depending on their evaluation, underwriters can give a full or contingent approval for the loan. Contingent approvals mean the borrower should submit more information as required, and once they check out, they’ll be cleared to close.
• Suspension: In some cases, an underwriter may question the borrower’s file and suspend their loan until the borrower resolves the pending issues.
• Denial: The third outcome is denial of the loan. Whether the loan officer pre-approved the applicant, the underwriter’s thorough review can lead to a final decision to deny them the loan.

Why underwriters deny loans

No borrower wants to hear their loan application was rejected. But underwriters usually have good reasons to deny loans, since they protect the lender and the borrower.

Here are some common instances when underwriters deny loans:

• The borrower’s debt level (new or hidden)
• Change in employment status or job loss
• Issues with the collateral or assets
• Low credit score
• Missing paperwork
• Low appraisal value
• Borrower’s financial situation
• Extremely high debt-to-income or loan-to-value ratio
• Unusual bank account activity
• History of missed payments

How long does the underwriting process take?

Underwriting varies depending on the type of loan product the borrower applies for and the type of loan underwriting method used (manual, automated, or both). Examining the risk profile of each applicant’s investment can take anywhere from a few days or weeks.

For instance, personal loans are simple to underwrite, and you can instantaneously compare it to a mortgage loan application, which can take up to 5-8 business days on average (from when the underwriter receives a file to the final determination).

But the process can take longer than average to approve, suspend, or deny based on factors, such as:

• Lender’s staffing levels and application volume
• Loan officer’s competence and underwriter’s experience
• Lender’s underwriting process and guidelines
• Types of loans applied for
• How quickly the borrower responds to the underwriter’s request for more documentation

How lenders can overcome underwriting challenges 

Documentation issues, communication challenges, tedious manual reviews, and shortage of experienced loan processing and underwriting staff can affect your lending institution's ability to process more loans and faster to grow your revenue. 

That said, there are some quick ways to overcome these underwriting barriers: 

• Implement automation technology: Customize your underwriting workflow by embracing technology that can manage loan statuses, document processing, conditions clearing, and protect against fraud. For instance, Inscribe—an AI-powered fraud detection and automation tool—can streamline your underwriting workflows, saving your team hundreds of hours per week without increasing risk exposure.
• Training: Train your loan officers frequently to ensure they're clear on best practices and what's required on loans before sending the applications to underwriting. 
• Regular communication: Incorporate consistent communication cadence with your loan officers and underwriting team while providing comprehensive status updates to avoid unnecessary calls, texts, or emails. For instance, you can hold daily meetings with your team to review their pipeline and identify their daily needs, priorities, and loan status issues.

Streamline your underwriting workflows with Inscribe

In the current lending climate, you need a combination of technology and human expertise to deliver a better underwriting process.

Inscribe can improve your underwriting tasks workflow so you can approve credit and loan applications quickly, accept more customers with confidence, and make your customer experience superior to the competition.

Talk to an expert to find out how Inscribe can work for your business.