The complex process of loan approval involves many processes. Given the borrower’s profile and risk, you must understand them before lending. Therefore, the lender’s credit department puts much effort into evaluating and verifying your loan application. The disbursement value is calculated by examining several factors to assess the credit risk of the application. This process is called loan underwriting.
What is Loan Underwriting?
Financial organizations asses risk through underwriting to decide the possibility of default on your profile. The term refers to its working model, which is the level of risk an underwriter is ready to take on in return for a premium or interest rate. The lender might decline your funding request if the risk is too big.
Many financial products, such as life and health insurance, belong to the underwriting process in addition to loans.
Types of Underwriting
Loan or Mortgage Underwriting
Whenever you apply for a loan at the bank, application-related requirements such as your bank statement, credit history, and collateral (if you’re seeking a secured loan) are evaluated.
Securities Underwriting
Generally, investors, particularly investment banks, hire securities underwriters. This is conducted to understand the cost and risk of securities that have risen in an initial public offering (IPO). Depending on the initial underwriting, the decision to continue underwriting the shares issued by the firm, make the IPO, and then sell them in the outer market will be decided.
Insurance Underwriting
An insurance underwriter analyzes the prospective policyholder’s level of risk for all kinds of insurance by considering all aspects they may think appropriate. This evaluation will reveal the insurance coverage, deductions, inclusions, and premiums. It may also result in your application being rejected.
Types of Underwriters
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Mortgage Underwriters
A mortgage underwriter evaluates your application and examines the level of risk involved. Then, they decide whether to approve or reject it.
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Debt Security Underwriters
Generally, debt securities underwriters purchase, sell, and make a profit, either directly or via dealers. Securities that include municipal and corporate bonds are the products they deal with. Similar to an underwriter syndicate, they collaborate at times.
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Insurance Underwriters
Before approving or rejecting an application, insurance underwriters evaluate the risk associated with the applicant. If they approve, they determine the premium by considering the applicant’s risk. In addition, they publish policy-related guidelines.
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Equity Underwriters
Equity underwriters generally monitor a company’s stocks and distribution. However, during initial public offerings (IPOs), when businesses seek their help in deciding the price to issue shares, they play an even more significant role.
Types of Underwriting Processes
Automated Underwriting
In this process, the lender relies primarily on technology to perform basic or advanced risk evaluations. By using advancements in machine learning, artificial intelligence, and various other technologies, they can determine an applicant’s suitability for a loan in a matter of minutes. Digital lending apps offering personal loans are the most popular places to find automated underwriting. Typically, the approval time is as short as thirty seconds in such apps.
Manual Underwriting
This type of underwriting is commonly used in conjunction with automated systems. When big loans or secured funding require an in-person inspection of the pledged or mortgaged assets, manual underwriting takes place. In addition, the lender will conduct manual underwriting by checking your income and other financial records, especially if this is the borrower’s first loan application and they have no credit history.
Steps Involved in the Credit Underwriting Procedure
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Credit History Review
This step gives the lender a proper understanding of your borrowing habits and attitude towards repayment. A hard inquiry, which is the process of seeking a report of your credit from a credit agency, is the initial step of the process. The lender looks into the total amount of outstanding debts, the number of active credit cards, and the rate of use shortly after they receive your report. Following that, they check past credit habits to determine if there is any history of default or irregular EMI payments on your previous debts. A lousy report leads to loan refusal without further underwriting.
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Income Review
Your current savings are disclosed to the lender, which they use to check the documentation you provide for your income. They will review your bank statement to ensure there is no income gap in the salary credit. Ensure to provide proof of your passive income alongside it – you will need to file your income taxes if you have no salary slips. It is necessary to provide all your income since a more significant income qualifies you for better loan terms. After successfully verifying your passive income, your loan application will be sent for further review.
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Employment Check
Certain loan types require a range of job experience. For instance, if you are a paid candidate seeking a car loan, you must have at least one year of work experience, including six months at your current job. Yet, most lenders will only consider self-employed applicants if the loan is a mortgage with a real estate asset as collateral.
At this point in the loan underwriting process, the lender will examine the consistency and frequency of your job changes. They will also attempt to assess the lender’s reputation to ensure there won’t be any further pay delays.
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Debt-To-Income Ratio Examination
As one of the most critical stages of the loan underwriting process, analyzing the debt-to-income ratio helps identify whether an applicant is likely to default. An excellent job history and steady income signal that the applicant is a good candidate.
The debt-to-income ratio is the monthly income percentage contributing to the EMI repayment. Regardless of the loan type, you can divide your monthly EMI by your total monthly income to obtain this ratio. An acceptable debt-to-income ratio of 40–50% will get you a lower interest rate on a personal loan.
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Property Condition Verification
Physical property verification is needed as part of the mortgage loan underwriting process. It evaluates the property’s overall condition, circle rate, and age. The loan application may be declined if the subject property is aged and requires high maintenance. Furthermore, you must have all your mortgage documents for your loan to be approved – even the slightest error can result in rejection!
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Financial Record Analysis
Your investment certificate will be examined by the lender if your loan application is supported by an investment. They examine both the scheme’s return and the period left till maturity. Typically, funds are provided in return for debt instruments and cash value, such as life insurance or bonds.
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Credit Appraisal
As soon as the previous procedures are complete, the lender will move on to the credit appraisal process. At this stage, the lenders decide the loan amount you qualify for. An excellent credit history, a low debt-to-income ratio, and a steady job can qualify you for a larger sum indicated on the lender’s website. Naturally, a strong profile can give you a low interest rate.
What Is the Duration Required To Underwrite a Loan?
Underwriting turnaround depends on several factors. Once you apply for a credit card or personal loan, it may take a few minutes to several hours. However, securing funding, like a mortgage, takes a few days, given the additional work associated with property verification and assessment. However, a delay can be caused by incomplete or erroneous papers, so ensure everything is in order before submitting your application.
