Check out our guide to loan underwriting to understand what it is, the difference between manual & automated, steps in the process, & what lenders look for. Table of Contents
Not all lenders are created equal, but there are certain areas of the lending process they have in common.
Underwriting is one of them. This process helps lenders understand their customers and their risk status to safeguard against unexpected loss.
In this guide, weâll help you understand what underwriting is, the different types of underwriting lenders perform (consumer, business, loan, etc.), the difference between manual and automated underwriting, the steps in the underwriting process, and what lenders look for.
Underwriting is a lenderâs process of evaluating and managing risk. Through underwriting, banks and other financial services providers carefully review a borrowerâs credit history and financial background to determine their eligibility for a loan.
Once a borrower submits a loan application and itâs accepted, the underwriting process kicks in. The credit underwriter assesses the borrowerâs finances and past credit decisions to give them an overview of their degree of risk.
For example, when a borrower applies for a home loan, the lender will rely on underwriting to evaluate the application and determine whether to approve or reject the mortgage. If you operate an investment bank, underwriting can help you raise money for a client, like in an initial public offering (IPO).
The personal loan underwriting process can seem mysterious and intimidating. As a borrower, you submit your application and then wait anxiously to hear back What exactly happens during those tense days or weeks while your loan is “under review”?
Underwriting is actually a very logical, methodical system lenders use to analyze risk and determine if you qualify for a personal loan When you understand the step-by-step progression of underwriting, you can put yourself in a better position to get approved.
In this comprehensive guide, we’ll walk through the personal loan underwriting process from start to finish You’ll learn
- What underwriting is and why it matters
- The 7 key steps involved in underwriting a personal loan
- Tips to improve your chances of approval
- What to do if your application gets denied
Let’s get started!
What Is Underwriting?
Underwriting is the behind-the-scenes process a lender uses to analyze a loan application and decide whether or not to approve it.
The goal of underwriting is to determine the risk of lending money to a particular borrower. Specifically, the lender wants to know:
- Will you repay the loan as agreed?
- If you default, does the lender stand to lose money?
To find the answers, underwriters investigate the borrower’s finances, credit, and collateral (if required). They use the information to create a comprehensive risk profile.
Based on that risk analysis, the underwriter will either approve the loan, ask for more information, or deny the application.
So in short, underwriting protects the lender by minimizing defaults and losses. As a borrower, you want the underwriting process to go smoothly so your loan gets approved!
The 7 Steps of Personal Loan Underwriting
While the exact underwriting process varies by lender, it generally follows the same basic path:
Step 1: You Submit Your Application
You’ll provide personal information like your name, address, date of birth, and Social Security number. You’ll also submit financial details about your income, employer, and monthly expenses.
For some lenders, you may be able to pre-qualify or get pre-approved with just this initial application. But underwriting doesn’t officially begin until you formally apply for a loan amount.
Step 2: Underwriters Verify Your Identity
Underwriters need to confirm you are who you claim to be! They’ll verify identifying information like your name, address, birth date, and Social Security number.
Step 3: Underwriters Pull Your Credit Report and Score
Now it’s time to check your credit history. The underwriter will obtain credit reports from one or more of the three major credit bureaus – Experian, Equifax, and TransUnion.
Your credit report provides the details of your past borrowing and payment history. It lists credit cards, loans, mortgages, and any late payments, defaults, or bankruptcies.
Your credit score summarizes your creditworthiness in a three-digit number. Most lenders require a minimum score for approval. The higher your score, the better your chances of getting approved and securing a low interest rate.
Step 4: Underwriters Verify Your Income and Employment
To confirm your income, underwriters may ask for W-2 forms, pay stubs, tax returns, or other proof of earnings. They want to see stable income from verifiable sources.
Underwriters may also call your employer to verify your employment status, position, salary, and length of time on the job. Steady employment often translates to lower credit risk.
Step 5: Underwriters Assess Your Financial Obligations
Underwriters will review your monthly expenses, debts, and other financial obligations. In particular, they analyze your debt-to-income ratio (DTI).
DTI compares your total monthly debt payments to your gross monthly income. The lower your DTI, the more likely the loan will be approved, since you have extra room in your budget.
Step 6: Underwriters Evaluate according to Lending Criteria
At this point, the underwriter compiles all the information into your risk profile. They weigh:
- Income and employment status
- Credit history and score
- Assets and financial obligations
- Debt-to-income ratio
Then they determine if you meet the lender’s predetermined lending criteria. If you satisfy all the rules and benchmarks set by the lender, congratulations – you’re approved!
Step 7: You Receive an Approval (or Denial) Notice
Finally, the underwriter communicates their decision. If approved, you’ll receive loan terms including the interest rate, monthly payment, fees, and other specifics. Then you can decide whether to accept the offer and proceed with finalizing the loan.
If your application is denied, the notice should explain why. Potential reasons for denial include poor credit, high debt, or inadequate income. But don’t worry! There are things you can do to improve your chances if you apply again.
Tips for Smoothing the Underwriting Process
Because underwriting is so critical in the loan approval decision, you want the process to go as smoothly as possible. Here are some tips to help your application sail through underwriting:
Boost your credit score – Improving your credit score even a small amount can mean better loan terms and lower interest rates. Pay down balances, dispute errors on your credit report, or take out a credit builder loan to give your score a quick boost.
Pay down existing debts – Lower credit card balances and other revolving debts to reduce your DTI. Even small dents can improve your ratio and chances of approval.
Provide all needed documents upfront – Tax returns, bank statements, pay stubs. Having these ready to upload or submit will prevent delays.
Explain blemishes on your application – Mistakes happen. If you’ve had past credit issues, provide context to show you’ve changed your financial habits.
Only apply for the amount you need – Asking to borrow more than necessary may get your application denied. Stick to what you can reasonably afford to repay.
Avoid major purchases or new accounts – Large purchases or new credit accounts can raise red flags during underwriting. Hold off until the loan is approved.
Following these tips sets you up for underwriting success!
What If My Application Gets Denied?
Don’t panic if your personal loan application gets rejected during underwriting. Here are some options:
Ask why – Find out the reason for denial so you can address it. Common reasons include DTI too high, credit score too low, or insufficient credit history.
Dispute errors – If your credit report contains mistakes negatively impacting your score, launch disputes with the credit bureaus right away.
Improve your credit – There are many ways to boost your score over time. Pay all bills on time, lower credit card balances, take out a credit builder loan.
Provide more documentation – Submit any additional materials the lender requests to strengthen your application.
Apply with a cosigner – Adding a creditworthy cosigner may help you get approved and secure better rates.
Shop lenders – Each lender has its own lending criteria. If one denies you, keep trying others to find one that’s a good fit.
Reapply later – After you strengthen your financial profile, try reapplying in six months to a year.
While rejection is discouraging, it’s not the end! Use it as motivation to improve your financial health and your chances of approval next time.
Now You Know: From Start to Finish
We’ve walked through the full life cycle of personal loan underwriting, from application to decision. Now that you understand what goes on behind the scenes, you can put your best foot forward.
Monitor your credit, manage debt judiciously, and supply all needed paperwork upfront. Taking these steps will get your application through underwriting with flying colors!
With preparation and diligence, you can become an underwriting pro. And getting approved for that personal loan you need will be smooth sailing.
Manual vs. automated underwriting: Whatâs the difference?
Credit underwriters used to employ manual underwriting methods to assess borrowersâ creditworthiness. This involved reviewing an applicantâs financial situation and other pertinent details to decide whether to approve or deny the loan.
As more consumers borrow loans, regulations also changed, which had an immediate and large impact on the underwriting process. Lenders and credit bureaus centralized their processes. Computers were also readily available, offering new insights for lenders to make more complex and profitable decisions at scale.
With more data and computing power, lenders have a complete picture of borrowersâ creditworthiness and can automate the underwriting decision-making process.
The result? Improved workflows and increased customer satisfaction.
A Global Insights Report by Experian shows most businesses say investing in digital decisioning software is the best way to improve engagement and customer acquisition. In addition, business owners plan to invest in artificial intelligence (AI) and increase their staffâs digital capabilities.
From the report, 60% of businesses plan to increase their budget for credit risk analytics, which AI and machine learning (ML) offer. This helps lenders by:
- Streamlining the underwriting process
- Giving them a clearer view of a borrowerâs creditworthiness
- Improving credit risk management and decisioning
- Increase operational efficiency
- Grow revenue
- Provide a positive customer experience
Automated underwriting is faster than manual methods, which rely on human effort to sift through and evaluate volumes of individual loan applications and financial statements. However, automated systems are also limited in unique borrower circumstances, such as varied incomes, in which case manual underwriting makes it easier for the lender to qualify a borrower.
An underwriting survey by Accenture, in partnership with The Institutes, found that underwriters use technology for better decision-making. 46% of those surveyed say it has positively impacted automation or elimination of non-core tasks. They also feel technology may cause more harm despite it boosting their speed to quote, access to knowledge, and ability to handle larger amounts of business.Â
Lenders looking to gain a competitive edge use a combination of manual and automated underwriting methods (like the Fannie Mae Desktop Underwriter) to gauge a borrowerâs loan eligibility and financial risk.
Whenever an automated system flags a borrowerâs application, a human loan officer will review and analyze it again to determine the best approach.
What are the steps in the underwriting process?
Bank underwriting will differ from company to company and depend on the type of loan.
For instance, underwriting a personal loan would differ from that of a mortgage, which includes extra steps like appraisal and title search, and insurance to determine how much to lend the borrower.
However, lenders follow similar strict underwriting guidelines, which may be accompanied by computer models for loan and risk analysis.
Typically, the underwriting process follows these steps:
- Screening: Once a borrower submits their loan application, a loan officer screens the documents for creditworthiness before turning it over to the underwriter. This involves credit checks and a review of the applicantâs business finances.
- Underwriting: The loan officer sends the application to an underwriter who double-checks it to get all the information they need for underwriting analysis. This is a deeper dive than the initial assessment by the loan officer because the underwriter determines whether to approve or reject the application. Theyâll also appraise the borrowerâs business to know if they can afford to repay the loan and set a risk value for the company.
- Loan approval, suspension, or denial: Based on the underwriterâs report and recommendations, the lender will approve, suspend, or deny the borrowerâs loan application. If approved, the lender takes on the risk and stipulates the loan and repayment terms. If suspended or rejected, the underwriter may ask for more information to make a more informed decision. And if rejected, the lender wonât take on the risk and denies the application altogether.
2 Big Reasons Home Loans Blow Up In Underwriting – [Underwriting Mortgage Process]
FAQ
What is underwriting in the personal loan process?
How long do underwriters take to approve a personal loan?
What are the 4 C’s of loan underwriting?
What are the stages of personal loan?
What is personal loan underwriting?
The good news is you probably need only a basic understanding of personal loan underwriting: Underwriting is the process a lender uses to determine how risky it is to lend to a borrower. There are three possible outcomes to underwriting: The underwriter approves the loan. The underwriter asks for more information.
What is underwriting and how does it work?
Underwriting is the process of taking on risk in a financial transaction, typically a loan, insurance, or investments. Underwriters assess risk, determine how much to assume, and at what price. Underwriting helps set rates for loans, premiums for insurance policies, and the cost of risk in securities markets.
What is a loan underwriting process?
The loan underwriting process is the steps a lender uses to determine if the risk of offering a loan to a borrower is worthwhile. During this process, the lender looks at bank statements, paycheck stubs, and other financial data to ensure the borrower can repay a loan.
Does your personal loan application have to go through underwriting?
If you have ever applied for a loan, you’ve probably heard that your application had to go through “underwriting.” Underwriting is a big part of the personal loan application process. But because it happens in the background and it’s not a common word, it might seem a little mysterious.