What is an underwriter?

What is an underwriter? 

You'll remember the nail-biting wait for approval if you’ve ever applied for a mortgage or loan. Well, an underwriter is behind the scenes deciding how viable a candidate is from a lender’s perspective and ultimately grants the approval. 

A financial organization usually employs underwriters to assess, evaluate, and assume the applicant's risk. Underwriters get paid a fee or commission for their role in the process. 

Underwriters tend to be industry-specific and are experts in their chosen products. Whether it's mortgages, insurance, loans or investments, the underwriter knows the topic like the back of their hand, so they can confidently decide if an applicant is suitable.  

What does an underwriter do? 

Unlike brokers, underwriters aren’t trying to sell you a deal or a product; they are there to confirm whether you qualify once you’ve chosen the product or service you want. 

Fundamentally, an underwriter’s job is determining whether candidates will likely pay what they’ve borrowed as promised. 

To do this, the underwriter has to do three things: assess, evaluate and assume. Let’s look at each of those in more detail.  

Assess  

An underwriter needs to gather relevant information about the borrower to help them judge if they are a good candidate for the financial product they’re applying for. 

For instance, if the candidate is applying for health insurance, the assessment might involve looking at their age and medical history. On the other hand, a loan underwriter assessing a candidate for a mortgage might be looking at their credit history.  

Evaluate 

The next stage of an underwriter’s process is to weigh up all the information they’ve gathered about the candidate to make a judgment about an acceptable level of risk for this candidate. They’ll also look at what collateral is available in case the candidate defaults.  

Many underwriters now use software to help them make this evaluation. At this stage, the underwriter decides the premium amount and any terms to apply to the policy. 

With the help of software, underwriters can also use an algorithm to compare an application to historical data to determine the likelihood this applicant will meet their repayment obligations. 

Assume 

If an underwriter determines that a borrower should be given the service they’ve applied for, the underwriter themselves has to assume the risk.  

Underwriters have to decide whether this policy will work in favor of the company they’re acting on behalf of, and if it makes a loss, the underwriter is accountable. This is another factor that differentiates an underwriter from a broker. 

Sometimes you have one individual acting as a lead underwriter who is known as a book runner. 

The underwriter’s appraisal process can take time, anything from a few days to a few weeks, depending on the complexity of the application. 

What are the different types of underwriters?  

As we’ve mentioned, underwriters have a specialist subject, giving them an expert eye for all the policy details and risks.  

Let’s look at some of the most common types of underwriters. 

Mortgage Underwriters 

Many Americans will have a mortgage agreement underwritten at some point in their lifetime; mortgage underwriters are the most common group of underwriters. 

A mortgage underwriter has to assess a candidate’s financial history to determine how much they can borrow for a mortgage and whether they are likely to make their repayments. To make this evaluation, the underwriter looks at the candidate’s credit history, savings amounts, salary and any debts they might owe.  

To be fair to everyone, they must also review the property to ascertain its value matches its price and the loan amount. Mortgage loan underwriters hold the power of a final decision on a mortgage application. Mortgage underwriting typically has a turn time of a week or less. 

Their decision can be appealed, but an appeal is unlikely to be successful without much compelling evidence. 

Insurance Underwriters 

Whether you’re insuring your car or your home or applying for a life insurance policy, an insurance underwriter checks the contract benefits the insurer. 

Insurance underwriters are experts in particular insurance areas and know the risks with each candidate and policy. 

For example, auto insurance underwriters will look at factors including your driving record, credit history, gender and even your ZIP code and use this to decide based on their statistical data. 

An insurance underwriter checks if the candidate meets the criteria for their desired policy and will advise on how the policy applies to the candidate’s specific circumstances. They can also review existing policyholders and advise on renewing or changing policies. 

Loan Underwriters 

Auto loans, personal loans and business loans all have to be assessed by a loan underwriter. Like other types of loans, they will determine the candidate’s financial history to assess the risk of lending to the applicant. They will also take into account any collateral the candidate has. 

A loan underwriter also ensures the borrowing rates and premiums are appropriate. The size and purpose of the loan determine how long it takes for the underwriter to approve or deny the application. 

While underwriters can approve, suspend or deny an application, the most common outcome is “approved with conditions,” meaning the underwriter requires clarification or additional documentation. 

Securities Underwriters 

Securities underwriting is a slightly different role from other types of underwriting discussed so far. 

Securities underwriters (also sometimes called equity underwriters) most often work with investment banks to assess the risk and define an appropriate price for an initial public offering (IPO). Based on the underwriter’s evaluation, the investment bank buys (underwrites) securities issued by the company attempting the IPO and then sells those securities in the market. 

Securities underwriting is a specialist form of underwriting. These underwriters rely on a network of investment organizations to make decisions. 

When do you need an underwriter?  

When acquiring any loan, you will need an underwriter, including mortgages or insurance. The underwriting process can add time to your loan application, but it’s an important stage that protects all parties in the loan agreement.  

An underwriter should protect candidates from taking out loans they can’t afford. This should prevent loan applicants from getting into financial difficulty with unfavorable policies and unaffordable repayments. 

While an underwriter decides whether you qualify for a loan, they won’t advise whether the loan is right for you. A financial advisor can talk you through your options and help you make decisions for your financial future. 

The bottom line   

Underwriters are a vital part of taking out any loan and should work in the best interests of both the borrower and lender. 

If you would like to talk about loans, underwriting and your financial planning in more depth, a financial expert can help. Reach out to Unbiased today to connect with a financial advisor who can listen and offer advice based on your and your family’s circumstances.  

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