What is underwriting?
Updated May 2, 2023
Standard in real estate transactions that involve mortgages, underwriting is the process undertaken by a financial institution to determine whether the property's buyer is financially qualified for a loan.
Although the word underwriting sounds confusing, its etymology makes perfect sense. It originated with the financial backers of the venerable Lloyd’s of London insurance agency who wrote their names on a slip of paper under the description of the risk they decided to take; in exchange for underwriting, they were rewarded with a premium.
Underwriting is the process undertaken by a financial institution to determine whether the property buyer is qualified for a loan. Credit: Cytonn Photography/Unsplash
Typically in underwriting today, the buyer’s income, assets, debt and property details are verified before a loan is given final approval. The process can take anywhere from a couple of days to a couple of weeks.
Underwriters, who are financial experts, look at:
- The buyer’s credit score and credit report
- Debt-to-income ratio (how much money is owed versus income)
- Down payment amount
The buyer’s assets also are calculated as they could be sold for cash to cover any defaulted payments.
Lenders generally require a minimum credit score of 580 to 620 on a system where the perfect score is 850, depending on the type of loan.
An appraisal of the property also is part of the underwriting process. After the appraiser determines the value of the property, the underwriter compares it with the amount of the mortgage being requested. It’s a due-diligence move: If the numbers are not in sync (the home is worth less than the loan), the mortgage will not be approved.