What is Underwriting?
In real estate, underwriting is an essential process that lenders use to determine the creditworthiness of potential customers. This process helps protect both parties involved in the real estate transaction by assuring that the borrower has the financial capacity and collateral necessary to fulfill their end of the bargain.
When you want to borrow money to buy a property, underwriters will first assess your creditworthiness. The underwriters will check to make sure you're a good fit for a loan, meaning you are creditworthy and that the value of the property being purchased is appropriate. They will look at your financial history and debt-service coverage ratio (DSCR), as well as take into account your credit score from major bureaus.
Afterwards, they will examine the property value and to check that the sale price of the property meets its appraised value. By simply comparing the two numbers, underwriters justify the sale price. They also verify that the title is clear and there aren’t any concerns with regards to who owns the property. While confirming ownership, they will assess the potential risks posed by natural disasters on the asset before granting approval.
Getting an accurate appraisal is so often highly stressed in real estate, and here is yet another instance where it is especially important. More often than not, underwriters will require an appraisal before approving a loan. This confirms that the property is worth the investment and that the money you'll get from selling it will cover the loan.
Underwriting is a concept that originated from Lloyd's of London back in the 17th century. Although it has evolved over time, it's still a vital part of the financial world today. Underwriting has a long history of helping people secure financing when they need it.
Like we mentioned earlier, underwriting is so beneficial because it provides protection for both the lender and borrower from risk. Underwriters ensure that borrowers have the financial capacity and collateral necessary to fulfill their end of the bargain. Underwriting also serves as a form of due diligence for lenders. By examining an applicant's finances and assessing risks, lenders can be sure that they are not taking on too much risk when approving a loan.
Without checking the DCSR, you might not catch added risks from the borrower. A higher DSCR means that the borrower is less likely to default on loan payments. Overall, underwriting plays a crucial role in providing financing for those who need it while also reducing risks for both of the parties.
Underwriting is a complex and essential process that makes sure both the borrower and the lender in a real estate deal are protected. It checks that the borrower can actually afford to pay back the loan, and helps the lender figure out how risky it is to give the loan. Also, it's not just traditional banks that do underwriting - even private money lenders use it to decide if someone and their property fit their lending criteria. Anyone thinking of getting into real estate needs to know all about underwriting and why it matters so much.
We'd love to hear your thoughts about this article and our blog. Let us know how we did by completing the Unreal Estate Blog Feedback Survey.
Unreal Estate holds real estate brokerage licenses under the following names in multiple states and locations:
Unreal Estate LLC (f/k/a USRealty.com, LLP)
Unreal Estate LLC (f/k/a USRealty Brokerage Solutions, LLP)
Unreal Estate Brokerage LLC
Unreal Estate Inc. (f/k/a Abode Technologies, Inc. (dba USRealty.com))
Main Office Location: 1500 Conrad Weiser Parkway, Womelsdorf, PA 19567
California DRE #01527504
New York § 442-H Standard Operating Procedures
TREC: Info About Brokerage Services, Consumer Protection Notice
UNREAL ESTATE IS COMMITTED TO AND ABIDES BY THE FAIR HOUSING ACT AND EQUAL OPPORTUNITY ACT.
If you are using a screen reader, or having trouble reading this website, please call Unreal Estate Customer Support for help at 1-866-534-3726
Open Monday – Friday 9:00 – 5:00 EST with the exception of holidays.
*See Terms of Service for details.