What is underwriting and why is it necessary in obtaining a mortgage loan?

 

Underwriting is the process a lender uses in order to ensure you are a qualified borrower and that you have the means and intent to fully repay your loan. During this step of the loan process, an underwriting expert looks at a borrower’s credit, collateral, and capacity to repay. These professionals dig deep to verify where your money is coming from and your financial history.

 

Underwriters are like the security team for lenders. If you can’t prove your creditworthiness, they do not allow you access. Standards for a loan application are typically higher than a loan pre-qualification letter. So while a borrower may have been “approved” for a certain amount on a pre-qualification letter, this number could change one the qualified underwriter has reviewed various financial items.

 

The appraisal of the home is included in underwriting. It gives the underwriter all the details as it pertains to a loan, from the borrower’s financial background to their financial future. Taking into account the home being purchased, the underwriter is able to accurately assess if the borrower is in a secure position to borrow money and repay it for a certain amount on a certain home.

 

Perceived risk is a key factor the underwriter looks at. Their job is to determine the perceived risk a borrower has if a lender loans them money. If the risk is too great, a loan will likely be withheld, or at least not granted for a significant amount.

 

It is important for the lender to consider the whole picture when providing a loan to a borrower. While the underwriting process may seem tedious and can be uncomfortable as it is very involved, it is an extremely critical step that needs to be taken in order to protect the lender and their money.