Check out this guide to better understand the loan underwriting process, make it more efficient for your teams, and approve more customers with confidence.
When a customer applies for a loan, they send all their financial documents and wait for you—the lender—to approve or reject their application.
Unless they're cash buyers, there’s one last hurdle to face before finalization: underwriting. The fate of their financing lies in the hands of a loan underwriter, who will determine whether your client is a risk.
Understanding the loan underwriting process helps you guide clients and increase their chances of securing the funds.
This guide explains the loan underwriting process and how to make it more efficient for your teams.
Loan underwriting is the process lenders use to determine the creditworthiness and risk level of a borrower before accepting or denying their application.
Before lending money to a borrower, you must:
This is where loan underwriting services come into play: A loan officer evaluates the borrower’s income, financial history, and credit report. With this information, the underwriter will either approve the loan, request more information, or refuse to take on the risk and reject the borrower’s application.
Every lender has its own loan underwriting process with a strict set of guidelines based on capacity, credit, and collateral. Computer models also help underwriters analyze loans and the risk of lending to borrowers.
In the analog days, underwriters relied heavily on a borrower’s credit score to make lending decisions. This rating is still relevant today, but many lenders prefer cash flow and other alternative credit data points because it indicates the borrower’s repayment risk. FinRegLab, a nonprofit innovation center, found that deposit and credit card accounts provide a more comprehensive and detailed picture of the borrower’s cash flow. This provides data for loan underwriters to make informed lending decisions.
The mortgage underwriting process is long and tedious, depending on the methods and processes a lender uses. However, underwriters typically follow these five steps:
Let’s take a closer look at each step.
Before the borrower looks for a property to purchase, they need pre-approval for the loan. As a lender, you’ll review the borrower’s financial information (income, debts, and credit history) to determine pre-approval for the loan.
Now, pre-approval differs from pre-qualification. The former indicates that the borrower is approved for a certain amount of money—and usually requires them to give the lender more details. The latter shows the borrower could get approval for the loan.
Once you pre-approve the borrower for the loan, the next step is income and asset verification. You’ll need additional documentation and information from the borrower, such as:
If the borrower qualifies, you’ll issue a pre-approval letter with the approved amount based on the information they provided. The pre-approval letter shows property sellers the buyer’s serious and can back their offer with financing.
The next step? For a mortgage, it would be to appraise the property to assess whether the amount the borrower offers is valid with the property’s:
Engage a licensed third-party appraiser to create a report based on a physical evaluation of the property compared to other similar, recently sold listings.
The appraisal process report shows the property’s actual value, so the underwriter can compare it to the sale price and calculate the loan-to-value (LTV) ratio.
Another step in the mortgage loan process is to determine if the house has any issues (such as legal claims). To do this, you can perform a title search with a title company to ensure the property is transferable.
Title searches look for information, including:
Then, a title insurer gives the mortgage lender at least one insurance policy that guarantees the accuracy of its research and findings to protect the lender and property seller.
Depending on the underwriter’s review of the loan application, they can either:
The loan underwriting process can last from a few days to several weeks, depending on:
Once the borrower meets all the pending conditions, the lender will approve their application and fund the loan.
Innovations in banking technology have increased consumer demand for faster service. These changes came with multiple challenges for lenders in loan underwriting and digital lending, including:
Loan underwriting has multiple tedious parts, but you can save your team hours per week without increasing your risk exposure using digital tools like Inscribe.
This AI-powered fraud detection and document automation platform:
With Inscribe, you and your team can approve more customers faster and with confidence.
VIVA Finance—a fintech company in the consumer lending industry—wanted to expand into new markets. The team experienced a fraud scare as scammers became more sophisticated in creating deceptive documents.
In addition, the company’s growth increased its risk exposure and its manual review teams were struggling to quickly learn the intricacies and nuances of new documents.
By using Inscribe’s robust technology, VIVA Finance transformed its document review process and improved fraud detection with artificial intelligence (AI). The results:
Ready to streamline your loan underwriting process to make it faster, simpler, and more efficient? Talk to one of our experts to get started.
Check out our other guides on loan underwriting: