What is loan underwriting? Definition, types and how it works

Understanding the loan underwriting meaning is essential when applying for a home, personal, car, or business loan. The underwriting process involves evaluating your credit profile, income, and eligibility to determine loan approval. This credit underwriting ensures the lender can assess risk accurately and make informed lending decisions. Depending on the complexity, underwriting may take a few hours to several days. Being aware of the process helps you avoid loan rejection and ensures a smoother borrowing experience.

How does underwriting work

• The loan underwriting process begins once you submit your loan application and documents.
• A lender evaluates your income, credit score, repayment history, and overall financial profile.
• This underwriting process helps determine your loan eligibility and the risk involved.
• Underwriters verify the authenticity of your submitted documents.
• Based on the findings, the lender either approves, rejects, or requests more information.

The process ensures that only eligible borrowers receive loans, reducing risk for the lender.

Types of Underwriting

• Loan underwriting can be classified into different types based on how the evaluation is done.
• The common types of underwriting include manual underwriting, automated underwriting, and hybrid underwriting.
• Manual underwriting involves a loan officer personally reviewing your application and documents.
• Automated underwriting uses algorithms and software to assess your loan eligibility quickly.
• Hybrid underwriting combines both manual and automated methods for a more balanced evaluation.
• Understanding these types of underwriting helps borrowers prepare better for the approval process.

Factors affecting loan underwriting

Here are the factors that affect loan underwriting.

Credit score

This is one of the essential factors influencing loan underwriting. A credit score reflects your creditworthiness and shows how prudent you've been in managing and repaying past loans. A high credit score of 750 and above indicates you as a responsible borrower.

This enhances your creditworthiness and helps you get a loan at competitive personal loan interest rates. On the other hand, a poor score can throw the entire borrowing exercise off track. Paying bills on time and serving existing EMIs without default can boost your CIBIL score. As per regulations, you can check your credit score for free once a year from each of India's four credit information companies – TransUnion CIBIL, Equifax, High Mark and My Account.

Income

Just like your credit score, your income plays a crucial role in the underwriting process. Most lenders fix a certain income below which they usually don't lend. Since loan repayment is one of their top priorities, they want to ensure that you have an adequate income to help you easily serve the EMIs.

Current debt and liabilities

Another essential factor affecting underwriting is your current level of debt and liabilities. If you have too much debt and liabilities to serve, it impacts your loan repayment ability. The underwriter wants to ensure that you have enough money in your kitty after paying your debts to clear the current loan.

Ideally, your monthly EMIs considering all your loans, present and past, shouldn't be more than 30-35% of your monthly income.

Additional read: Where to check your CIBIL score

Value of the collateral

In case of secured loans such as home loan, car loan, etc., you need to pledge an asset you own as collateral. Underwriters gauge the collateral's value to ensure that it can be used to recover the loan amount in case of a default. If the collateral doesn't have a value equal to or higher than the loan amount, it will serve little purpose.

Property appraisal

Property appraisal forms a part of the underwriting process in case of home loans. Here, lenders get underwriters to ensure that the property's price is comparable to similar properties to rule out chances of you saving a large portion of the loan amount by buying a cheaper home. Once the underwriter is satisfied with everything, the loan amount is transferred to your bank account. Thanks to pre-approved offers from Bajaj Finserv, availing of finance on home loans, business loans, and personal loan is a hassle-free process. All you need to do is share your basic details to know your pre-approved offers.