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What Is Credit Underwriting?

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  • Written By: C. Mitchell
  • Edited By: John Allen
  • Last Modified Date: 13 September 2016
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The term “credit underwriting” can mean one of two related things: first, it refers to the process through which banks and other financial institutions decide which people or companies to lend to, and second, it means the process of actually issuing lending instruments, be they mortgages, bonds, or other securities. A credit underwriter is a person or entity that assumes the brunt of the liability in a credit lending scenario. In most cases, the underwriter purchases the credit instrument from a financial institution. Then, the underwriter chooses who can get that instrument, and names a price.

Banks and similar institutions typically make a significant amount of money through loans and credit extensions. In order for these relationships to be profitable, the credit recipients must be trustworthy and must be solvent enough to make at least the minimum payments. Underwriting is a process banks use to minimize liability and ensure a certain return on investment.

Credit underwriters are sometimes employed by banks, but can also be independent entities. In most cases, a bank first extends credit to a credit underwriter at a certain fixed price. The underwriter then solicits and selects borrowers. Borrowers then pay the credit underwriter, who in turn will repay the bank. Credit underwriters are very common in mortgage and home loan situations, as well as in corporate stock and bond distributions.

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The first step to credit underwriting is usually a credit check of any potential borrower. Checking credit involves calculating a borrower’s credit score, evaluating the source and extent of any outstanding debt, and looking at past loan repayment practices. The goal of credit checking is to determine how credit-worthy a particular borrower is, or is likely to be.

Financial analysis and other risk assessment also comes within the purview of credit underwriting. Credit underwriters are usually looking for the maximum possible return on credit and loan extensions. As such, they must determine both what sorts of interest charges and fees the market will bear, as well as the kind of payments that individual borrowers are capable of making. In this respect, credit underwriting can be quite a science of numbers, predictions, and complex equations projected over time.

Credit underwriting also includes the way in which a loan or other credit extension is executed. Underwriters typically set their own terms with respect to which borrowers are selected, as well as the terms of each individual credit extension. They often work under the direction of the bank or primary lending institution, but usually also have a lot of latitude with respect to specific selections.

Some underwriters work privately, handling the loans of only a select group of borrowers. Others offer their loans and credit extensions to the general public. Terms and rates usually differ depending on the underwriter’s situation and the borrower’s ranking. The calculation of terms and rates, how they should change over time, and the initial selection of the borrowers are all essential parts of credit underwriting.

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