What is Underwriting?
Underwriting is the process a lender takes to assess the risk associated with approving a mortgage loan application.
During this process, an underwriter will evaluate the borrower’s credit history, income, employment, and debt-to-income ratio. The underwriter will also review the property’s value and condition to ensure it meets their lending guidelines and standards. Additionally, the underwriter will assess the borrower’s ability to make the monthly mortgage payments, considering their income and other financial obligations.
Why is this term important?
Underwriting is an important step in the mortgage process, helping ensure responsible lending practices and reducing the financial risk for all parties.
If the underwriter determines that the borrower and property meet the lender’s criteria, they will approve the loan. If not, they may require additional information, deny the application, or offer alternative terms. The goal of underwriting is to minimize risk for both the lender and borrower and ensure that the loan is a sound investment.
Here is an example:
Once a homebuyer has a successful offer on a home, they will complete a mortgage application. In this example, we’ll say that the buyer has applied for a mortgage with a 25-year amortization period.
After reviewing the buyer’s credit score, income, and other debts, along with the given property, the underwriter comes to the conclusion that the buyer will not be able to comfortably afford the required monthly mortgage payments. Instead, the underwriter returns to the buyer and offers them a mortgage with a 30-year amortization period. The buyer accepts these terms and is approved for the mortgage.