An underwriter decides if approving a large purchase, issuing a loan or an insurance policy to an applicant is feasible and doesn’t put the financial institution backing the loan or insurance policy at unnecessary risk.
The company or an individual who provides underwriting services takes a financial risk for a premium, commission, spread, or fee. In simple terms, the lender needs to verify that you can pay back the loan and they hire an underwriter to do the assessment job for them.
However, if the contract brings in too much risk, the underwriter is accountable for the loss.
The underwriters play a vital role in many financial industries such as:
- Mortgage industry
- Insurance industry
- Equity markets
- Debt security trading
What Does An Underwriter Do?
Let’s take an example that you are applying for a loan of £150,000. The lenders need to assess that you have a high probability of paying back £150,000. This assessment is based on your health and financial status and is a three-step underwriting process.
- You have computer approval. Most financial contracts are underwritten with computer software. Therefore, the computer will first issue an approval based on the data you enter in your application.
- The underwriter verifies the information that was put into the computer program by you.
- Your application is approved or denied by the lender based on the evaluation of the underwriter.
The information provided by the computer to the underwriter varies from case to case. An underwriter working for a health insurance company will verify and review the medical details of the applicant while an underwriter working for a lending institution will assess the financial factors of the applicant such as credit rating.
What Are The Different Types Of Underwriters?
Let’s suppose that you have completed your mortgage application and all the required documentation such as financials, inspection reports, and the appraisal have been reviewed by your lender. Next, the lender will submit every piece of information to their mortgage underwriter.
The task of the mortgage underwriter is to verify the information provided and to determine whether or not the mortgage is a good decision for the borrower and the lender. The mortgage underwriter assesses the total number of mortgages the lender has given out and also takes the following factors under consideration for the applicant.
- Credit score and credit history
- Overall savings
- Proof of steady income
- Debt-to-income ratio
- Value and type of the property
- Other factors to determine the risk
Based on these factors, the underwriter can approve or deny the mortgage. The applicant can appeal the decision but the process can be lengthy and tiring. That is why, most of the time, the denied applicant goes to another lender instead of going into the appeal process to the existing mortgage underwriter.
You might have heard of a loan underwriter when you went through your loan approval process. Your loan processor may have contacted you and told you that your loan has been approved by the underwriter with certain conditions. Therefore, to meet those conditions, you may have to submit additional documents or submit answers to additional questions for that underwriter to be able to approve the loan which will allow you to move through the rest of the loan process.
In layman terms, a loan underwriter is a person involved in the home or auto loan process. The loan underwriter job is to ensure that the documentation provided by the applicant meets the lending guidelines.
Insurance companies protect businesses and people against loss by assuming billions of pounds in risks each year. But the question is who is protecting the insurance companies?
Insurance underwriters scrutinise insurance applications by examining actuarial reports, medical records, and other data to decide if their company can take a chance with the applicant. They are the ones who decide whether or not to issue an insurance policy and how much to charge for it.
Insurance underwriters use computer models called smart systems to evaluate insurance applications. They reject those applicants who are not eligible and adjust the premium rates for the approved ones.
An equity underwriter is a bit different from a mortgage or an insurance underwriter. The equity underwriter determines an appropriate price of an IPO (Initial public offerings) by assessing the investment’s risk. Quite often, an equity underwriter works for an investment bank or another financial institution that specializes in equity markets.
Large and small banks, as well as financial institutions, use loan underwriters to determine the risk of lending funds to the applicants. Underwriters are real people and they use the combination of computer software and personal assessment methods to determine the risks for both the lenders and the applicants.