Woman In Office Working As Underwriter

Underwriters: A Definition And What They Do

Sarah Li Cain7-minute read
November 30, 2021

When you apply for a loan, the process to get from application to approval can be complicated. That’s because lenders want to make sure that the financial risk they’re going to take by approving you is worth it. Lenders put underwriters to work to determine your creditworthiness. Think of them as decision-makers when it comes to approving your loans.

Let’s take a closer look at who underwriters are, what they do, and where they usually work.

What’s An Underwriter?

An underwriter is a member of an organization who helps assess, evaluate and assume the risk of another party for a fee. Underwriters typically work for mortgage, loan, investment or insurance companies. Chances are, you’ll work with underwriters if you’re looking for insurance or getting approved for some type of large purchase.

You’ll find that there are underwriters who specialize in various industries because each one has requirements based on what lenders are looking for in applicants. For example, a life insurance underwriter has different skills from health insurance and mortgage underwriters.

Underwriters usually have ample training – they’re typically required to undergo a training program or complete a major in their industry.

What Do Underwriters Do?

Underwriters evaluate a person’s financial situation and assess how much risk it will be to the lender if they give them the loan, or to the insurance provider when they offer coverage. In other words, underwriters will use their expertise to determine whether issuing an insurance policy or a loan is in the company’s best interest. The underwriter faces losses if they issue a policy or loan and it turns out the borrower or policyholder is deemed too risky.

Information underwriters use will be different depending on the type of loan or insurance policy. For instance, a mortgage underwriter may look at factors such as an applicant's debt-to-income ratio, whereas a life insurance underwriter will assess someone’s medical history.

Since the underwriter’s job is to figure out what's acceptable risk and assess eligibility factors, they need to comb through an immense amount of details and research.

What Is The Underwriter’s Process And How Does It Work?

Essentially, an underwriter looks at factors specific to the loan or insurance policy you’re applying for and assesses your risk levels to determine eligibility. They'll work with the lender or insurer to determine whether to approve you, as well as work with you to ensure they have all the documentation needed.  Basically, the underwriter verifies information including credit scores, income, assets, debt, tax returns, credit card balances, property details, and the loan size to issue final approval.

Remember, underwriters look at different factors depending on what you’re applying for. So, if you’re getting life insurance, for instance, they’ll look at factors such as your age, gender, driving history, medical history, lifestyle, and whether you’re a tobacco user.

There is a chance you may be denied coverage or a loan if you can’t meet the requirements. If you’re approved, you’ll be offered coverage or a loan with terms based on your risk profile.

What Are Some Common Types Of Underwriters?

The most common types of underwriters are insurance, securities, loans and mortgage. Find out more about them in detail below.

Loan Underwriter

A loan underwriter assesses the risks involved when offering a borrower a loan – examples include an auto or a personal loan. Their goal is to determine the likelihood a borrower will pay back the loan and whether a lender considers the applicant’s risk profile acceptable.

Factors loan underwriters look at include pay stubs to verify income, your credit report to determine the likelihood of loan repayment and monthly expenses to understand how much free cash you have available.

Mortgage Underwriter

A mortgage underwriter falls under the umbrella of a loan underwriter but with a specific focus on mortgages. Their goal is to ensure borrowers meet all of the underwriting requirements before approval, such as being able to afford the monthly down payment and closing costs.

Mortgage underwriters typically require the following information:

  • annual income
  • current debt ratio
  • credit history
  • credit score
  • available savings
  • tax returns
  • bank statements (for nontraditional loans)

Underwriters also have to take into consideration the appraisal value of the property you’re trying to purchase to make sure the home is worth the loan amount and the purchase price. However, the mortgage lender will have the final say on approval.

Insurance Underwriter

An insurance underwriter reviews applications for insurance policies. There are specialized underwriters for each type of insurance, including auto, home, life, dental, disability and health insurance.

After submitting your application, an insurance underwriter will review your application and check it against a few databases for accuracy.Some of the databases include the following:

Medical Information Bureau (MIB): The MIB is a nonprofit company of health and life insurance companies that compile your insurance application history.

Intelliscript: This database is used to determine what prescriptions you have filled over the past few years.

Motor vehicle report: Your motor vehicle report helps insurance companies determine if you have a history or tendency toward speeding and other risks like driving under the influence (DUI) or driving while intoxicated or impaired (DWI).

Credit reporting agencies: Some insurers use your credit report to help figure out potential risks for filing a claim, which can affect insurance rates.

Securities Underwriter

A securities underwriter often works with initial public offerings, or IPOs. They help determine the appropriate price for an IPO based on an investment’s assessment risk. There are two types of securities underwriters: institutional underwriters (who work for specialized financial companies) and noninstitutional underwriters (typically more like brokers).

Securities underwriters normally work for an investment bank or some other investing specialist company. They hold a huge responsibility because if the IPO doesn't sell for its suggested price, the investment bank or banks are held liable for the difference.

On the flip side, if they do a great job and can sell above the price of the IPO, then they will receive an underwriting spread or gross profit from the deal.

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The Importance Of Underwriting

Underwriting is important because it helps companies determine factors such as the risk of insurers for an investment. Lenders want to make sure they’re lending money that’s in line with a borrower’s risk level, by offering a fair interest rate on a loan. In the same vein, insurers use underwriting processes to set the right premiums to cover the actual cost of an insurance policy

Underwriter Vs. Agent Vs. Broker

An agent or broker is a professional who engages with the applicant directly, whether it’s to take out a loan or purchase an insurance policy. Think of them as someone who sells you a product and acts as a messenger to relay an underwriter’s decision on your loan or policy.

Underwriters are the decision makers because they look at your application and will determine whether you receive approval. As in, they usually have the final say as to whether you’ll receive a loan or insurance policy.

Underwriters FAQ Section

Here are some frequently asked questions about underwriters:

What makes a good underwriter?

A good underwriter has strong math skills, excels at interpersonal communication, and has high problem-solving capabilities. They’re also analytical, with high attention to detail. That’s because it's the underwriter's responsibility to build a profile for each person and make a confident and robust decision on why they should or shouldn't be approved.

What do underwriters look for in a loan approval?

A loan underwriter looks at three areas: income, assets and credit. However, the specifics of what they look for will depend on the type of loan.

How long does the underwriting process take?

The amount of time the underwriting process takes will depend on factors such as what you’re applying for and the types of documentation the underwriter needs to look for.

To help speed up the process, submit all necessary paperwork as soon as you can.

What happens after the underwriter reviews your loan application?

Underwriters will issue one of three decisions: conditional approval, suspension or denial.

  • Conditional approval: You’re most likely to be approved, assuming you meet certain conditions.
  • Suspension: The underwriter has questions about your file, and may need to see additional documentation.
  • Denial: The underwriter denies a loan when they perceive an application to be too high risk.

What if the underwriter denies your application?

If your application is denied, you can speak to the lender or insurer to determine the reason. In some cases, you can ask them to reassess your application. Otherwise, use the information the lender or insurer provided to you to see how you can better your application for next time.

Can an underwriter deny an insurance policy or loan?

Yes. When the risk is too high, an underwriter can deny coverage for a loan or an insurance policy.

The Bottom Line

An underwriter determines what the risk will be for a lender or insurer. Underwriting is an essential part of the approval process, so understanding it is key if you want to increase your chances of having your application approved. To gain more insight, learn more about why lenders check your credit report and score.

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Sarah Li Cain

Sarah Li Cain is a freelance personal finance, credit and real estate writer who works with Fintech startups and Fortune 500 financial services companies to educate consumers through her writing. She’s also a candidate for the Accredited Financial Counselor designation and the host of Beyond The Dollar, where she and her guests have deep and honest conversations on how money affects our well-being.