Underwriting serves as a check of not only economic, but also psychological parameters of a potential borrower. It is important for the bank to know what is the probability of repayment of the loan provided. Knowing the general principles of underwriting can increase the chances of getting a positive response when submitting an application.
Definition of the concept
Underwriting is a term that has several meanings in the economic sector. One of the key definitions of underwriting is the assessment of risks when making a decision to grant a loan or when concluding any type of contract.
Any bank has its own verification system for a client who wants to get a loan. Basically, this system includes: assessing the borrower's profit, determining his credit situation, assessing the collateral that the borrower is ready to provide to the bank.
Based on the results of such a test, the bank can approve or reject the loan application. In addition, any credit institution has the opportunity to make a decision to provide a loan on its own terms, and not on those requested by a potential client. For example, a bank may offer to decrease the loan amount and / or increase the interest rate.
Types of underwriting
There are 2 types of underwriting:
- Automatic (scoring);
- Individual.
An automatic assessment by the bank is performed during an express check of the borrower's solvency in consumer lending for small amounts (for example, POS lending, express lending). The bank employee enters information about the borrower into a special program, on the basis of which it assigns him a certain number of points. Based on the results of the points gained, a decision is made on the loan. This lightweight customer rating system takes a small amount of time (up to 1 hour).
Individual underwriting is used for lending for large amounts (car loans, mortgages, etc.). In the process of assessing a borrower, several bank services interact at once: credit, legal, security. They carry out a painstaking assessment of the information provided by the borrower, as a result of which the period for consideration of the loan application increases and can last up to 10 days.
The final conclusion on the application in this case is made by the underwriter, who analyzes the information provided by the borrower and related services. To prove the data from the questionnaire, a bank employee, as a rule, calls at the borrower's place of work and his contact persons.
What is included in the manual underwriting procedure
- Information about the borrower's employment is collected and analyzed - its reliability, length of service, profession, the value of the borrower in the labor market;
- The monthly costs of the borrower are analyzed;
- The ratio of the amount requested by the borrower to the total family budget is considered;
- The amount of the borrower's income is checked - official and additional (if any);
- The credit history is considered in terms of past loan refusals or successful / unsuccessful repayment of previous loans;
- Data on property ownership (real estate, cars, land plots, securities) is being checked;
- The level of education of the borrower is assessed;
- The reliability of the borrower's employer is checked;
- The timeliness of payment of utility bills is investigated;
- The bank checks the borrower for a criminal record, administrative liability.