How Does The Underwriting Process Work?

Underwriter shaking hands with client

If you’ve ever applied for a mortgage, refinance or other type of personal loan, you’ve probably heard the term ‘underwriting’ but you may not necessarily understand what the process is.

Underwriting is the process through which your lender verifies your eligibility for a home loan, credit card or personal loan.

Underwriters are important as they are ultimately the final decision-makers as to whether or not your loan is approved. They follow a fairly strict protocol with little wiggle room.

This article will provide you with some important guidance if you’re currently going through or will be going through the underwriting process in the future, such as what underwriting is, how long the process takes and the factors that underwriters will consider.

Key Points

  • ‘Underwriting’ is a process that you’ll likely be familiar with if you’ve ever applied for a mortgage or other type of personal housing loan.
  • Checks are made on things like your credit history, past and present employment status and bank statements.
  • The underwriter has an important role as he or she is ultimately in-charge of determining your eligibility for a loan.

What is Underwriting?

Underwriting is the process during your mortgage or other personal loan application where checks are made to determine what level of financial risk your lender would be taking by agreeing to give you a mortgage.

Professional underwriters use a series of checks to decide how likely it is that you will default on the mortgage loan you’ve applied for.

If they think there’s a big risk you might not repay the mortgage in accordance with the agreement, then your mortgage application could be declined.

What Factors Do Underwriters Consider?

Underwriters will take all basic factors into consideration including your name, age, gender, employment, credit history and type of product and amount you have request.

The specific documents needed for your loan application will vary based on the type of loan you are receiving from your lender or underwriter (an FHA loan, for example, often requires more paperwork).

You can expect to be asked to provide evidence of your tax returns, credit score, W-2s, bank statements, and pay stubs as part of mortgage underwriting.

Typically, lenders will also look at your last 24 months of employment. Employment gaps may require a letter of explanation.

You can also expect to send additional documentation every time an underwriter or lender has a question.

For instance, your bank statement might show a recent $2,000 deposit. You will know that it’s a birthday gift from your grandparents, but the underwriter will not. You may therefore have to write a letter of explanation for your lender detailing that this $2,000 deposit was, in fact, a gift.

How Long Does Underwriting Take?

The underwriting process can take anywhere from a few hours, days or a few weeks, depending on whether the underwriter needs additional information from you, what demand is like for the lender and how streamlined the lender’s practises are.

Some underwriting processes are completely automated by technology, so that you can get an instant decision and even receive your loan on the same day as applying, if approved.

The quicker you compile your documents and respond to the lender’s requests for information, the smoother and speedier the process can be.

Some underwriting processes are very manual, sometimes because the amounts are much larger (such as home loans and mortgages) or because there are a lot of factors to take into consideration.

Can Underwriting Be Used For Insurance?

Yes, underwriting is also used in insurance when deciding whether a policy is approved, the pricing and the terms of the insurance policy. With small vehicles and cars, this is often automated, but when insuring expensive policies such as cruise ships, planes or even people, this is something that is typically underwritten manually.

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