What Do Underwriters Do: A Complete Guide

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 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.

Underwriter Definition

An underwriter is a member of an organization who helps assess, evaluate and assume the risk of another party for a fee. They typically work for mortgage, loan, investment or insurance companies. Chances are you’ll work with these professionals 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 specialists.

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, they will use their expertise to determine whether issuing an insurance policy or a loan is in the company’s best interest. They face 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 specialist may look at factors such as an applicant's debt-to-income ratio, whereas a life insurance specialist will assess someone’s medical history.

Since their 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.

The Underwriting Process And How It Works

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, they verify 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. For example, if you’re getting life insurance, they’ll look at 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.

The Importance Of Underwriting

Common Types Of Underwriters

Underwriters typically evaluate applicants for insurance, securities, loans and mortgages. Here are some more details about them.

Loan Underwriter

A loan underwriter assesses the risks involved when offering a borrower a loan, such as an auto or a personal loan. Their goal is to determine the likelihood a borrower will pay back the loan and whether a lender should consider the applicant’s risk profile acceptable.

Factors loan specialists 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 mortgage applicants meet all of the requirements before a home loan approval, such as being able to afford the monthly mortgage payment and closing costs.

Mortgage specialists typically require the following information:

• Annual income
• Current debt-to-income 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, they 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 this underwriter: institutional underwriters who work for specialized financial companies, and noninstitutional underwriters, who are typically more like brokers.

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

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. They usually have the final say as to whether you’ll receive a loan or insurance policy.

Underwriter FAQs

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 their responsibility to build a profile for each person to 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 do underwriters take during the process?

The amount of time the underwriting process takes will depend on factors such as what you’re applying for and the types of documentation they need 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: They have questions about your file, and may need to see additional documentation.
• Denial: They deny a loan when they perceive an applicant to be too high of a risk.

Why would an underwriter deny a loan?

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?

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.