What is Underwriting and How Does it Work?

Mortgage_monkeyOnce you’ve finished your house search, made an offer for the property and been pre-approved for a mortgage, you may feel as though that home is yours. Unfortunately, however, the process is far from finished.

You still have to prove your credit worthiness to the underwriter before everything will go through on the sale, and if it is proved that you’re not worthy of credit, the sale will not go through. The job of checking your credit risk lies with the underwriter, and if you’ve told any ‘little white lies’ on any of your forms, the underwriter will find them.

Why Do Underwriters Exist?

For this reason, you can think of the underwriter as a form of ‘real estate detective’. Although your loan company may have pre-approved your finances, the deal isn’t sealed until the underwriter has approved it too. This is because the standards of the underwriter are much higher than the loan company. They will examine your application with a fine toothcomb in order to see if you have represented yourself in a fair and accurate manner. A loan company will assess your request at face value.

The reason that underwriters have increased their scrutiny is because of the reckless lending that led to the financial crash. Beforehand, banks were relatively loose with their lending and, as a result, many people were given loans that they simply couldn’t pay off. As a result, many homes have been repossessed, and because banks cannot afford to lend, they have tightened their regulations, employing underwriters. Today, you won’t be approved for a mortgage unless you can afford it and this provides both you and the bank with reassurance.

Spotting ‘Red Flags’

Any declared bankruptcy in your credit history or any irregularly will be considered to be a ‘red flag’. A red flag does not disqualify your loan qualification straight away, but it does make obtaining a mortgage much harder. If you have a solid employment history and can prove that you have rebuilt your financial situation significantly, however, you can still qualify. At the very least, they’ll accept a large down payment.

When your application is underwritten, the amount of money you owe will be factored into the equation. As a general rule,

Types of Underwriting

Underwriting, however, doesn’t only apply to mortgages. Many businesses the world over use underwriters to assess their insurance and the insurance they offer to others. Huge underwriting and insurances companies such as Catlin USA have specialist insurance policies for every situation and, as a result, they employ underwriters who specialize in specific niches.

So, to conclude, an underwriter will assess how much of a risk you are for a mortgage or how much of a risk you pose for insurance purposes. Remember, just because you’ve been pre-approved for finance doesn’t mean the underwriter will agree, and they will always flag it up if they think that you are trying to borrow more than you can afford.