Definition of "Underwriting"

Underwriting is a term often used with financial connotation. It is a process that helps individuals or institutions to determine if it’s worth taking a financial risk in a particular situation in exchange for a fee. Most of the time, this risk involves loans, investments, or insurances. This process helps establish appropriate premiums to fairly cover the cost of insuring policyholders, set adequate borrowing rates for loans, and create a market for securities by accurately evaluating investment risks.

Underwriting in real estate

In real estate, underwriting works the same way, and it is the process of evaluating a loan application to determine the degree of risk involved. You may be wondering how the process of underwriting works? There are different mortgage loan types, but each lender uses the same underwriting process to determine the risk of a mortgage application. There are multiple ways a lender can determine that risk.

Most commonly, the underwriting will evaluate the financial standings of the borrower and the value of the property involved in the transaction. For a mortgage loan application to be approved, the lender needs to make sure that the borrower will be able to repay the loan, and in case of defaulting on the loan, the lender needs to ensure that the potential loss is recovered through the estate.

This is all achieved through the underwriting process, which will determine the viability of a deal. You can look at the underwriting process as the pre-approval process for a loan. For example, during the underwriting process, the lender might look up a borrower’s credit score to see if they have the minimum required credit for a home loan.

Underwriting is not only required by lenders, but real estate investors would benefit from learning the process to underwrite a deal themselves. In doing so, investors can make informed investment decisions to avoid losses, and it will help separate a bad investment from a good one.

 

image of a real estate dictionary page

Have a question or comment?

We're here to help.

*** Your email address will remain confidential.
 

 

Popular Mortgage Terms

A payment made by a lender to a mortgage broker for delivering an above-par loan. A par loan is one on which the lender charges zero points. Lenders charge points on loans carrying ...

Authorization by the lender for the borrower to pay taxes and insurance directly. This is in contrast to the standard procedure, where the lender adds a charge to the monthly mortgage ...

An upfront cash payment required by the lender as part of the charge for the loan, expressed as a percent of the loan amount; e.g., '3 points' means a charge equal to 3% of the loan ...

Inserting provisions into a loan contract that severely disadvantage the borrower, without the borrowers knowledge, and sometimes despite oral assurances to the contrary. Prepayment ...

A loan eligible for purchase by the two major federal agencies that buy mortgages, Fannie Mae and Freddie Mac. Conforming mortgages cannot exceed a legal maximum amount, which was $322,700 ...

Same as term housing expense. The sum of the monthly mortgage payment, hazard insurance, property taxes, and homeowner association fees. Housing expense is sometimes referred to as PITI, ...

A credit report contains detailed information regarding the relationship history of an individual with several financial institutions. How do I get a Credit Report?You ask a credit bureau. ...

A derogatory term for lender fees that are expressed in dollars rather than as a percent of the loan amount. ...

Limit on the size of payment change on an adjustable rate mortgage. ...

Popular Mortgage Questions