The practice of underwriting is based around evaluating risk. It is a practice used in a variety of financial services including mortgages, loans and insurance.

Loan underwriters

In loan terms, this means evaluating the risk of lending money to an applicant. The underwriter will analyse all aspects of the application and decide whether to lend to a given applicant.

Each lender wil have their own exclusive underwriting process. Nonetheless, most loan underwriters will have a minimum criteria that all applicant must meet to be approved for the loan. This criteria will be made up of several parts including credit scoring, affordability, verification and identity.

The underwriting checks

The first underwriting checks will start as soon as the initial application is made. Some lenders may even build some checks into their online application form. For example, they may not allow you to complete an application if you’re under a certain age, or fail to meet their net income requirements.

The underwriter will also carry out the credit search. Nowadays, credit searches are used for more than simply accessing your past repayment behaviours. Underwriters will often use them to verify your identity, compare key credit data to your application and assess your financial associations.

Based on the information in your credit search, the underwriter is able to make assumptions surrounding your future repayment behaviour. If you’ve recently missed a lot of payments on credit commitments or have been late paying, this will undoubtedly have a negative impact on your chances of approval.

Supporting documents

As part of the application, lenders may ask you to provide some supporting documents. This could include bank statements, wage slips or utility bills. These will be used as a part of the underwriting process to verify the details on your application and assess spending habits.

An underwriter may also carry out an income vs expenditure check to assess the affordability of the loan repayments. It would be irresponsible for a lender to approve a loan, knowing that an applicant would struggle to afford the repayments. If you’ve met all other criteria, but you narrowly fail the affordability check, lenders may offer you an alternative loan amount or loan term to reduce the repayments and make them more affordable.

Underwriting guarantor loans

In the case of a guarantor loan, the underwriter will carry out checks on both the applicant and guarantor. Here, the applicant’s credit score may not be as heavily scrutinised as the guarantor’s. The applicant will however need to prove the loan is affordable.

Risk based pricing

Based on the results of the checks, the underwriter will either approve or decline the application.

Some lenders will offer what is known as ‘risk based pricing’. With this, the rates that they offer will be dependent on the risk of lending to that given applicant. An applicant with perfect credit will be offered lower rates whereas an applicant with adverse credit will be offered higher rates.

When you hear a lender or broker use the term ‘underwriter’, they’re simply referring to the person who’ll be assessing your application.

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