Real Estate Glossary

What is Underwriting?

Underwriting is the process of evaluating and assessing the risk of a potential borrower or investment. Underwriting is primarily used by financial institutions such as banks, insurance companies, and investment firms, to determine whether to approve a loan, issue an insurance policy, or invest in a particular security. In the context of lending, underwriting involves evaluating the creditworthiness of a borrower, which includes analyzing their income, employment history, credit score, and assets, as well as the value of the property being used as collateral. The underwriter will also consider the terms of the loan, such as the interest rate, loan-to-value ratio, and amortization schedule. In the insurance industry, underwriting involves evaluating the risk of insuring a particular individual or group, based on factors such as age, health, and lifestyle. In investment underwriting, the underwriter will assess the potential return of a security, such as a stock or bond, and the risk associated with that investment. The goal of underwriting is to determine whether the potential borrower or investment is a good risk and whether the financial institution can afford to take on that risk. The underwriting process helps financial institutions to make informed decisions and to manage their risk.