What does an underwriter do?

REVIEWED BY JAMES GHEEN | PUBLISHED ON AUG 29, 2019 | 8 MIN READ

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We usually hear about underwriting as a profession when we talk about insurance. But underwriters are not just found in the insurance industry. They also engage in mortgage and financing services.

In this article, we will tackle in-depth discussions about what does an underwriter do, what is mortgage underwriting in general, what is the underwriting process, mortgage underwriting, and other relevant concepts.

This article will cover the following topics:

What is mortgage underwriting?

If you have had an experience of taking out home loans or mortgages, you may have wondered why the process sometimes takes so long. Have you ever wondered how these financing companies screen out mortgage applications and approve them? This is where mortgage underwriters enter the picture.

Generally speaking, mortgage underwriting is the process wherein a creditor applies to identify acceptable risks of granting a mortgage loan service to a specific borrower. Depending on the terms and conditions of the mortgage, a loan underwriter considers factors such as mortgage lender credit history, capacity to pay, and collateral to determine the acceptable risks of mortgage grant.

What does an underwriter do?

Now that we have broadly defined what mortgage underwriting is, we can now discuss in detail the things that an underwriter does. In this section, we will discuss and enumerate the functions that a typical mortgage underwriter takes on. What does an underwriter do?

Most mortgage underwriters are employed by banking and financing institutions. They work on the back end of operations by scrutinizing and screening all submitted sales applications from the sales teams and sales agents. They work on a detailed and careful analysis of all mortgage loan applications. He must have full knowledge of the mortgage lender’s policies to be able to screen applications properly. Essentially, underwriters are a critical part of the mortgage pipeline.

Assess mortgage quality

An underwriter reviews and assesses the quality of a mortgage loan application. Based on the guidelines set forth by the mortgage company, they analyze the many aspects of the mortgage application. Regarding the risks involved, mortgage underwriters give recommendations to loan officers about the loan amount, the closing costs, and proposed mortgage payments. Mortgage underwriters also make decisions regarding the grant of loans for extended periods.

The basic criteria used by any underwriter in the finance industry are the following:

1 – Credit – What is the applicant’s loan payment behavior over time? Is there any history of delinquency by the mortgage applicant? Does the applicant repay loans promptly? Are interest repayments done consistently?

2 – Capacity – Does the applicant demonstrate the ability to repay the home loan in the set period? Is the mortgage loan applicant employed or is in business or freelance field? Does the client have any outstanding home loans, credit card dues, bank loans, etc. that might affect his ability to pay promptly?

3 – Collateral – What is the value of the underlying asset that the mortgage applicant has? Is it enough to cover the costs of the mortgage? Will the property appreciate or depreciate over time?

A mortgage underwriter makes sure that the quality of the mortgage is good by scrutinizing details and facts.

Evaluate risks

Every mortgage transaction has an inherent risk. It is the job of the mortgage underwriter to piece out all related and relevant information to identify if the risks involved are worth taking by the mortgage company and the applicant as well. The mortgage underwriter’s determination and evaluation of risks will also impact how the mortgage transaction should be dealt with by both the lender and borrower.

Examples of the risks that must be carefully considered by the underwriter are:

  • Health risks
  • Currency risks
  • Economic risks
  • Solvency risks
  • Credit risks

Mortgage underwriters use layered risk management in their decision-making process. They don’t simply take the facts and documents as they are. They look deeper into each customer profile and assess all factors together to be able to make a good financial decision.

As underwriters use credit, capacity, and collateral as baseline criteria to determine approval, suspension, or denial, it is important to note that these factors are not independent of each other. A mortgage underwriter must use all these together to form a sound financial decision. This is what we call layered risk management. A mortgage applicant may have good credit but the collateral submitted is not that feasible. Or an application may have all these three factors, but the applicant has suspicious income sources.

Analyze and research facts

Being an underwriter is not a complete guesswork or gut feel function. An underwriter must have a solid basis for approving or declining a mortgage application. He must be able to understand metrics like credit score ratings, tax returns, bank statements, personal financial statements, credit reports, etc.

An underwriter has access to archives of many loan files and is bound by the confidentiality rules of mortgage companies. He must be able to research facts discreetly so as not to negatively affect any privacy issues of their clients. Relevant information about the client like medical history, family history, age, business dealings, payslips, employment history, travel, and hobbies are also used by mortgage underwriters in the decision-making process.

All these details are gathered by a mortgage underwriter to gauge a client’s credit reputation. A person’s credit reputation has something to do with his credit history, past mortgage applications, past property foreclosures, credit judgments, bankruptcies, etc. A credit reputation is a metric that helps underwriters determine an applicant’s willingness and ability to pay debts.

A person’s capacity to pay debts is also identified by mortgage underwriters using financial ratios like debt to income rate, cash flow statements, interest to income ratio, etc. The bottom line is that any mortgage underwriter wants to answer this question before approving your loan application: Can this person repay the mortgage plus its interests?

The role of an underwriter relies heavily on documentation and publicly available reports to gauge a client’s credit profile. As such, do not be surprised by the volume of requirements asked by your loan officer when you apply for a mortgage. These documents are pertinently requested by underwriters to help them in their evaluation. If a mortgage application package has been incompletely submitted to them, they have the power to return the application until such documents or important details are supplied to the underwriters’ satisfaction.

Why underwriters are important?

If you have been stressed out about your home loan application process taking too long, remember that it is also equally stressful for mortgage underwriters. These underwriters have to apply rigorous techniques, processing systems, rules and regulations and loan processes to justify the approval, suspension, or disapproval of any mortgage takeout.

While some underwriters who only need a few hours to screen a loan file before deciding to approve, suspend, or decline an application, most mortgage companies only have a few underwriters on board. This could make the waiting time even longer.

Generally, a clean loan file will be approved faster with the usual terms and conditions, even before a mortgage underwriter goes through the documents. What makes the function of mortgage underwriters tedious are the complexities that come alongside the properties mortgaged, foreclosure histories, bankruptcy, and judicial proceedings, etc.

Mortgage underwriters are very important as they are the frontline towards decision-making in accepting mortgage applications. Underwriters can either approve, suspend, or even decline applications received by the company. It is to the best interest of both the company and the client that an underwriter does his function well.

The role of underwriters has become very crucial for both mortgage and insurance companies since a large cash outlay is at stake for them whenever a risky insurance policy or loan is given out. The possibilities of paying more than what is acceptable for the sum assured of insurance policies or granting a loan application to a potentially bad borrower are alarming threats that a trained underwriter must carefully consider every single time.

Final Thoughts

The finance industry is already risky in itself. Thus, an underwriter must have a solid specialized foundation of finance, laws, and policies to help manage risks accordingly. Being an underwriter is a risky job. Evaluating risk that a mortgage company must assume when it grants out loan requires professional skepticism and careful study. If a risk accepted by the mortgage company has proven to be very costly to the company, an underwriter may be held highly accountable for it. That is why underwriters generally strive to do their job right every time.

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