Underwriting is the process that lenders, banks, and other companies use to decide whether or not to offer a financial product to a customer. Underwriters and underwriting exist to keep the loan market fair, allowing borrowers to have secure funding options.
What is Underwriting?
The term “underwriting” actually has roots that go back to before electronic lending, when underwriters would use literal ink and paper to draw up loan documents. During this time, the underwriters would write their names under the monetary amounts they were willing to accept risk for, hence the name underwriter. These documents would also contain details about the fees and premiums underwriters were entitled to collect in exchange for their services.
Who Does Underwriting?
Nowadays, underwriting is electronic and is usually automated. But underwriting is also still performed by people, making it a common occupation in the financial industry. People who have a career that involves underwriting refer to themselves as underwriters. Some different types of in-person underwriting are mortgage loan underwriting and certain aspects of the health insurance underwriting process.
What are the Different Types of Underwriting?
Several forms of underwriting exist. The three main forms of underwriting are:
Underwriting for a Loan
Loan underwriting is when a person or company reviews a loan applicant’s financial history, credit records, and more to determine whether they’re a good risk. Underwriters also consider any collateral offered to help decide if the applicant should receive approval for their requested loan. Certain types of loan underwriting, like different types of installment loans, are automated.
Other kinds of loan underwriting, like mortgages, must be done in person. With mortgage loan underwriting, the underwriter takes a look at the applicant’s debt-to-income ratio and financial records and history to determine the details of their home loan. Since this process must be in-person, Mortgage underwriting can take up to a week or more.
Underwriting for Insurance Purposes
Insurance underwriting can be a much more personalized process. In the past, medical underwriting for health insurance allowed companies to approve or deny applicants or limit coverage for people based on pre-existing conditions or other health issues. As of 2014, the Affordable Care Act prohibits this kind of practice in health insurance underwriting.
Now, underwriting for insurance focuses on an individual’s choices, lifestyle, habits, and other factors not involving pre-existing conditions. Since insurance underwriters require a lot of personal data to make the most informed decisions, the underwriting process for insurance can take up to several weeks. It may take a while, but it’s very important as health insurance is how most people pay for medical expenses.
What Factors Can Affect the Underwriting Process?
Underwriters typically focus on a few key details during the underwriting process. Take a look at the different factors that contribute to the underwriting process to identify your strong areas and learn what you may need to work on.
Credit Score
Underwriters will look at an applicant’s credit score to help determine loan details like interest rates, approved funded amounts, and more. Usually, when a loan applicant has a higher credit score, most lenders consider them less of a risk. Therefore, loan applicants with better credit are more likely to receive accommodating interest rates and higher loan amounts.
Length of Credit History
How long you’ve had a bank, savings, or any other financially significant account can contribute to how underwriters look at your loan, insurance, or investment application. Lenders may be wary of people who are new to finances, as inexperience can sometimes lead to poor financial decisions. But the longer someone has been managing their own funds and assets, the more comfortable credit unions, lenders, or other financial institutions generally feel about working with that person.
Payment Habits
When it comes to paying off various forms of debt, underwriting will usually favor applicants with a solid and steady loan payment history. When you repeatedly miss loan payments, your account will notate a delinquency visible to credit reporting agencies and eventually underwriters. But on the other hand, underwriters also take note of people who are responsible and have a habit of making their loan payments on or before their due date.
How Many Loans You Have
The underwriting process involves looking at what kinds of debt or existing loans someone may have. Underwriters would look at debt, such as any current student loans, mortgages, or other installment loans. Suppose there isn’t a lot of debt connected to a loan applicant. In that case, there’s a better chance an underwriter will want to accept their application.
Why is Underwriting Important?
Underwriting exists to keep the lending and general Finance industry in check. If it weren’t for underwriters, it would be easier for predatory lenders to issue sky-high interest rates or deny funding to people with a weak financial history.
Because of underwriters, lenders must abide by a set of rules and regulations to ensure that the borrowing market stays steady. Caps and minimums on interest rates and approved loan amounts make sure lenders are offering funding appropriately.
Some loan applicants may be wary of underwriters and the effect they can have on someone’s essential loan details. But, they exist to help maintain a fair and functional lending market for people from a wide range of financial backgrounds. Underwriters are just a part of the loan process, whether you need a mortgage or an online no credit check loan. To learn more, like how long a loan stays in underwriting, check out more of our helpful resources!