What Is Underwriting in Real Estate?

Underwriting is the process through which a lender verifies your income, assets, debt and property details before approving a loan and terms such as interest rate and fees. Underwriters perform an essential role in the real estate industry by facilitating the risk assessment of borrowers. While underwriting happens behind the scenes, it’s an essential step in securing a mortgage. Read on to understand what is underwriting in real estate. 

What Is Underwriting?

Underwriting is the process of verifying a borrower's assets, debts, income and liabilities. Officially, underwriting dates to the 17th century and the English insurance broker Lloyd’s of London. At the time, individuals gathered together to issue coverage for risky ventures such as sea voyages. In the original underwriting process, each risk-raker wrote their name and the total risk they were willing to accept in exchange for a premium. This can be listed under a description of the venture.

Now, the risk-taker is usually a bank, credit union or online lender, but the basic idea remains the same. Underwriting is the process lenders use to determine a borrower’s creditworthiness and the relative risk of the loan. Underwriting is used for insurance for all types of loans, including mortgages and, in some cases, investments. 

The lender uses underwriting to determine the total risk it will take on by offering the loan and uses this assessment to determine interest rates, fees, loan amount and loan terms. 

How Does Mortgage Underwriting Work?

The risk-taker for real estate investing is a mortgage lender such as a bank, credit union or online lender. The lender uses underwriting to assess the total risk exposure it will receive by offering the loan and uses this assessment to determine interest rates, fees, loan amount and loan terms. Underwriting in real estate also ensures that no one else is on the title and the property isn't in imminent danger because of natural disasters like earthquakes, volcanos or flooding. 

Before underwriting, you’ll need to provide various documents, such as proof of identity, proof of income, bank statements and tax returns, to a loan officer or mortgage broker. An underwriter will verify your identity, check your credit history and assess your financial situation, including income, cash reserves, investments and debts, to get a picture of your financial assets and liabilities.

Who Performs the Underwriting Process?

The underwriting process is usually performed by underwriters employed by the mortgage lender or financial institution. These professionals analyze and review all relevant documents and information submitted by the borrower. These certified professionals usually have a minimum of a bachelor’s degree with strong analytical and communication skills for the in-depth financial assessment required in underwriting. 

What Factors Do Underwriters Consider During the Underwriting Process?

Factors underwriters consider during the underwriting process include credit history, credit score, income, debt-to-income ratio and employment history. They will also weigh total assets and the property’s appraised value. In addition, these criteria can vary by the type of mortgage, Here’s how each of these can factor into your mortgage or HELOC approval. 

Credit History

Your credit history will affect whether you’re approved for a loan and the interest rate, repayment terms and loan amount. Your credit history includes your credit mix, length of credit history, amount of new credit, debt owed, payment history, credit inquiries, credit utilization, credit score credit accounts and information from public records.

To check what lenders will see, you can check your credit history and credit score with all three credit bureaus at annualcreditreport.com. Be sure to check for any inaccuracies and dispute them to protect your credit history. 

Credit Score

Credit score ranges from 300 to 850 in the most common scoring models. Lenders usually look for borrowers with a minimum credit score of 620, although some may approve loans for borrowers with a credit score as low as 580. Borrowers with a credit score of 700 or above may be eligible for lower interest rates or better terms.  

Debt-to-Income Ratio

Your debt-to-income ratio is important in the underwriting process. Lenders look for borrowers with a debt-to-income ratio of 30% or less, but in some cases, may approve a mortgage or HELOC with a debt-to-income ratio of up to 43%. 

Income

Proof of income is an important factor in the underwriting process. Lenders use income to determine the total loan amount and to calculate your debt-to-income ratio.

Employment History

Stable employment history is a key factor in loan approval. In general, mortgage lenders look for stable employment for the two years preceding the loan, with a salary that is stable or increasing over that time. This demonstrates to underwriters that you should be able to make consistent payments to repay the loan. 

Assets

Even with a lower income or a higher debt-to-income ratio, if you have significant assets or savings, you could secure loan approval. Underwriters also take into account total assets against total debts and liabilities to calculate your financial stability.  

Appraisal

The property appraisal is essential in the underwriting process. Underwriters calculate the loan-to-value ratio, which is the percentage of the property's value you’ve requested in the loan. The home you’re buying is used as collateral, so underwriters want to see the appraisal and asking prices of similar properties sold recently — comps — in your area. 

How Long Does the Underwriting Process Take?

The duration of the underwriting process can vary depending on several factors, including the complexity of the loan and the lender’s workload. On average, it can take anywhere from a few days to a few weeks. 

What Can You Do to Ensure a Smoother Underwriting Process? 

To ensure a smoother underwriting process, it is crucial to be organized and transparent during the initial application. Provide accurate and complete information, promptly respond to any requests from the underwriter and maintain open communication with your loan officer. Missing or incomplete information will only delay the underwriting process and could delay your loan approval. 

What Happens if Your Loan Gets Denied During Underwriting? 

If your loan gets denied during underwriting, the lender will provide you with an explanation of the reasons for the denial. This information can help you understand the issues and take the necessary steps to rectify them so you can reapply or search for alternative financing options. For example, if you need a higher credit score or lower debt, taking steps to increase your credit score or pay off debt can help you secure a mortgage approval when you reapply. 

Securing a Mortgage 

Underwriting in real estate is an essential process that can open doors to your first home or offer funding to purchase rental properties. Understanding what underwriters will look for can help you better prepare to secure a mortgage and increase the chances of favorable terms. Taking the time to prepare all necessary documents can also speed up the underwriting process and help you secure a loan faster. Ready for other options? Find the best mortgage lenders online here. 

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