Definition of "Underwriting"

Underwriting is a term often used with financial connotation. It is a process that helps individuals or institutions to determine if it’s worth taking a financial risk in a particular situation in exchange for a fee. Most of the time, this risk involves loans, investments, or insurances. This process helps establish appropriate premiums to fairly cover the cost of insuring policyholders, set adequate borrowing rates for loans, and create a market for securities by accurately evaluating investment risks.

Underwriting in real estate

In real estate, underwriting works the same way, and it is the process of evaluating a loan application to determine the degree of risk involved. You may be wondering how the process of underwriting works? There are different mortgage loan types, but each lender uses the same underwriting process to determine the risk of a mortgage application. There are multiple ways a lender can determine that risk.

Most commonly, the underwriting will evaluate the financial standings of the borrower and the value of the property involved in the transaction. For a mortgage loan application to be approved, the lender needs to make sure that the borrower will be able to repay the loan, and in case of defaulting on the loan, the lender needs to ensure that the potential loss is recovered through the estate.

This is all achieved through the underwriting process, which will determine the viability of a deal. You can look at the underwriting process as the pre-approval process for a loan. For example, during the underwriting process, the lender might look up a borrower’s credit score to see if they have the minimum required credit for a home loan.

Underwriting is not only required by lenders, but real estate investors would benefit from learning the process to underwrite a deal themselves. In doing so, investors can make informed investment decisions to avoid losses, and it will help separate a bad investment from a good one.

 

image of a real estate dictionary page

Have a question or comment?

We're here to help.

*** Your email address will remain confidential.
 

 

Popular Real Estate Terms

A portion of a real estate company's assets financed with debt instead of equity. It involves interest an principal obligations. Financial leverage is beneficial to real estate investors ...

In everyday discourse, a merger defines the combination of two entities, be it real estate or two companies, into a single and legit one. We should make a difference between a merger and ...

Income for investors arising from net long-term profits of a real estate mutual fund realized when the portfolio is sold at a gain. Fund managers pass on profits from sales of real estate ...

A cost of funds index that most adjustable rate mortgages written in California in recent years are tied to. Computed by the Federal Home Loan Bank of San Francisco, it reflects the cost ...

Sponsor sells interest to real estate investors in one property only. The total amount received from the equity investors is used by the sponsor to buy the property for the partnership. ...

Subsoil that is beneath the A horizon and above the C horizon of the earth. ...

Acquired by adverse land use for a statutory period of time. ...

Group of people residing in one home, usually consisting of a family. ...

Net operating income (NOI) of property relative to its market value. If rental income property worth $1,000,000 results in NOI of $100,000, the overall return is 10%. NOI compared to ...

Popular Real Estate Questions