Underwriting is an extremely important step of loan application. This is ultimately the key function that determines whether your loan application is approved or denied and under what conditions. No matter what type of loan that you apply for – be it a personal loan, home loan or medical loan – underwriting plays a crucial role in your loan application process, whether you know it or not.
In this article, the Operations Manager at LoanMe – Sahan Perera – discusses the importance of underwriting in FinTech and how the underwriting process at LoanMe has been clearly established to prevent borrowers from defaulting on their loans.
What is Underwriting & How Does it Work?
Underwriting might sound complicated, but it takes place across a number of sectors – ranging from loan underwriting to insurance underwriting to securities underwriting. Underwriting has been around for a long time and though the way it is being done has changed over time, it still continues to be a key function in the financial world.
With regard to loans, underwriting is the process of analysing whether loan applicants meet the minimum loan criteria and assessing the amount of risk involved. Simply put, it is what happens behind the scenes when you apply for a loan – when your lender verifies your details such as income, debt and assets, in order to decide whether your loan application is approved or declined.
The entire process is handled by an underwriter who will meticulously review everything – from declarations made on your loan application form to any additional documents provided by you. An underwriter will investigate your credit history, verify your income and employment, look at your debt-to-income ratio and verify any down payment and savings, as part of the process.
Though this process is usually not visible to the borrower, it is done thoroughly during loan processing and in some cases might require the borrower’s involvement. In those instances, the underwriter will contact the borrower, should they require any additional information or documents – or should they need to clarify anything.
What Factors Are Considered During Underwriting?
During the loan application process, your underwriter takes a look at a number of different factors which ultimately determine whether your loan gets approved or not. Below are some of the underwriting criteria for loans that are analysed:
Your Credit Score:
This is perhaps the most crucial factor that is reviewed since it is an indication of how the borrower handles debt and also their past history. The underwriter will check whether the borrower has paid their credit cards and previous debt in a timely manner, whether the borrower has had any debt that has gone into collections and so on. A strong credit score and a history of reliable on-time payments greatly improves the likelihood of your loan getting approved, whilst a bad credit history or any situation where you have had to declare bankruptcy could ruin your chances.
Your income is an indication of your ability to repay your loan. As such, your underwriter will need to check your income and employment status – which is typically sourced from the details provided on the loan application. Most lenders have a certain income level fixed as a mandatory requirement, below which they refuse to lend, due to the risk involved. Another factor that underwriters look at is your nature of employment. Employed borrowers who earn a regular wage or salary are greatly favoured over self-employed borrowers, who pose more of a risk for lenders. With regard to self-employment, underwriters typically look for at least two years of income history in order to ensure that the borrower is able to meet the minimum income level that is required.
Current Debt and Liabilities:
Another factor that is taken into consideration during the underwriting process is your current level of debt and liabilities. Having too much debt and liabilities will be viewed in a negative light by underwriters as this impacts your ability to repay your loan. Your underwriter will try to ensure that you have enough cash to make your loan repayments, whilst repaying any other debt that you may have.
How LoanMe Handles Underwriting
- At LoanMe, the process begins when our underwriters receive all the requested information and documents from the borrower during loan application.
- Our underwriters then conduct a thorough review and evaluation of the borrower’s present financial situation and verifies details such as the borrower’s financial statements and income.
- All fraud related compliance steps are strictly monitored and carefully followed until the underwriter is convinced that the borrower does not have any foul intentions.
- Ultimately a decision is made as to whether the loan is approved or declined based on the criteria and the borrower is notified.
Tips to Help You Through the Underwriting Process
Tip #1:Do not apply for a loan with the intent to default!
Applying for a loan with an intent to default is a very serious matter that could lead to legal repercussions and irreversible implications. Fraudulent or dishonest intent by the borrower during the time of availing a loan is a criminal offense and can be punishable by law – so make sure to avoid this at all costs.
Tip #2: Do not apply for new credit during underwriting
Any major financial changes or massive spending during the underwriting process could lead to complications. As such, it is best to avoid applying for new loans or credit while your loan is still being processed, in order to cause any unnecessary disruptions.
Tip #3: Respond to inquiries as quickly as possible
During the loan processing stage, your underwriter could contact you if they have any questions or details that they need clarified. In such situations where your input is required, make sure you revert with the requested information as soon as possible – in order to avoid any delays.
Tip #4: Be upfront and honest about your finances
Honesty is the best policy – this holds true even during loan application. Make sure that all the documents and details that you submit are correct and up-to-date and that you do not try to hide any important information. Be upfront about any missed payments in the past and your underwriter could be more lenient if they were offered an explanation as to what happened.