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.
Popular Real Estate Terms
Title to property being given under a court order because the original owner failed to pay the mortgage payments and/or real estate taxes. A judgment in a lawsuit may also have forced the ...
The definition of property acquisition cost in real estate is the total recorded cost of a piece of real estate after reductions in price, incentives, closing costs and any other ...
Contiguous shore area bordering a river that is subject to periodic water level increases. In the flood stage, the flood plain can be under water. ...
Indicators reflecting future changes in economic conditions; referred to as the Composite Index of 11 Leading Indicators. This index indicates the direction of the economy in the next six ...
In business, one may come across the cash accounting method, also known as cash-basis accounting, during the accounting period. The cash method of accounting is used where payments are ...
Federal act passed in 1974 regulating mobile homes. The act defines a mobile home as a "Structure, transportable in one or more sections, which is eight body feet or more in width and is ...
Rate of return of capital invested in building improvements. Is segregated from land investments and provides a method of separating property income streams between improvement and land ...
Building a structure in such a way as to reduce the process of destruction in the event of fire. Fire-resistant materials are used. ...
In real estate, asking price is referred to as the amount set by the seller, the amount he/she wants to receive for the purchase of their home by the buyer. The asking price isn’t ...
Have a question or comment?
We're here to help.