Understand the loan underwriting process

When you apply for a loan, as part of the process the information given by you is scrutinised and analysed in depth by the lender’s underwriting team before a decision is taken as to whether to approve or decline the said loan application.

What is loan underwriting?

Loan underwriting is the process wherein prior to taking a decision of whether to approve or decline a loan application, the lender (that is a bank or other financial institution) verifies the information provided by the applicant and confirms that the requirements as laid down by the lender for a particular loan facility are met.

Loan verification includes taking into account items such as employment or business history, salary or income and other financial statements, and the borrower’s credit history as detailed in the credit information report. Finally, it also takes into account the underwriter’s evaluation of the borrower’s credit needs and their intention as well ability to repay a loan they avail of.

The length of the underwriting process depends upon factors such as the completeness and complexity of the loan application received. It is also influenced by factors internal to the lender such as the underwriter’s experience as well as how busy the lender may be at the time. For example, if you apply for an education loan just before the start of a programme, it is likely that a lender already has their hands full with similar applications owing to the peak enrolment season and hence the time taken to process the application may increase.

What are the factors considered while underwriting loans?

Sound underwriting comprises of many aspects – judgement, experience and the underwriter’s ‘gut feeling’. This makes the process both subjective as well as objective. It is subjective to the extent that the underwriter forms an option about the borrower and their repayment capacity basis relevant opinions or impressions formed while reviewing the application. The objective view comes from understanding and analysing in depth the verifiable facts (such as income, other loan outstanding, past repayment track record) available before making the loan decision.

Let’s then take a quick look at the credit decision process.

Calculation of monthly expenditure: When a lender reviews your loan application they take into account the monthly outflow that you have, factoring in any obligations you may have, including monthly household expenses etc.

Existing debt repayment: When you have an existing loan the lender will take those into account as well, to determine whether it is possible for you to take on a further debt burden.

Monthly income: Not only is your cash outflow taken into account, but also what it is you earn each month, be it by way of a salary or a business income. This amount can also include any interest income (from investments such as fixed deposits) or rental income (from a property you are renting out), as it is an amount that occurs with regular frequency and can be relied upon when calculating the amount of debt you can undertake.

Debt to income ratio: What an underwriter does when assessing your loan application also includes determining just how much your current debt (or outstanding) is in comparison to your income. When your income holds its own against the outflow, the outcome is considered to be favourable and increases your chances of getting a loan. This is because you come across as someone who can handle debt well.

Review of credit profile: An important part of the process is scrutinising the applicant’s credit profile, i.e. pulling a copy of the credit report from a credit bureau to estimate the individual’s creditworthiness. This report is carefully scanned to check for loan defaults, skipped payments, account write-offs etc.

Keeping all the above factors in mind, the underwriter will review the applicant’s profile in entirety before making a decision either way. This in-depth analysis helps them to understand the risk involved in lending to a particular customer.

Loan underwriting and CIBIL scores

If your CIBIL score is good, the options available to you are a lot more, and most banks and financial institutions will be willing to lend you the loan amount you are looking for, whether to purchase a house or a car.

But do keep in mind that a credit score is one of the parameters that a lender uses while evaluating a loan application and is not the sole factor taken into account by any means. It is primarily a guideline and not used in isolation to other factors. If your credit score is low, it is not a given that a lender will reject your loan application outright; they are likely to weigh the other parameters as well, before taking a decision either way. Of course, the terms at which you may be offered the loan could likely be less competitive especially with regards to the interest rate than they would be otherwise, but a low score definitely is not the end of the road.

In conclusion

The loan underwriting process is a judgement call and underwriters are also human beings, willing to take a risk on those they believe will turn out to be ‘good’ borrowers! It is advised to check your CIBIL report before applying for the loan.

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