In simple language, the term “credit underwriting” in banking means a process of assessing risk involved while lending to a person or business. The underwriting process directly evaluates your finances and past credit decisions.
The person who is involved in the underwriting process is called an underwriter and the underwriter is responsible for deciding whether to accept or reject the application for credit. Determining risk is a complex process and the job relies on sensible judgment and meticulous attention to detail. An underwriter makes sure that you do not take any credit which you cannot afford and also ensures that you have submitted all your paperwork. In accordance to this, an underwriter can:
Looking at your credit history carefully means the underwriter pulls out your credit report and checks your score. Furthermore he/she, also analyzes your credit report to check any negative marking such as late payment, overuse of credit, bankruptcy etc.
Order Appraisal means underwriter will order the appraisal to ensure that the amount that the lender offers for the home, matches up with the home’s actual value. (In case of Home loan or Mortgage loan)
Then, the underwriter will cross check your income and employment, by asking for your income proof and employment situation.
Look at Debt–to–Income Ratio means underwriters examine your income and debt percentage to assess your capacity to return.Your DTI is a percentage that tells lenders how much money you spend versus how much income you bring in.One can calculate DTI by adding up the monthly minimum debt payments, and dividing it by monthly pretax income. An underwriter examines your debts and compares them to your income, to verify you have more than enough cash flow to cover your monthly mortgage payments, taxes and insurance.Besides DTI, the underwriter shall also assess your savings account to confirm if there are enough savings to supplement your income, or to use it as a down payment at a closing.
From the risk assessment perspective, an underwriter assesses a credit application (loan or credit card) based on certain parameters. These parameters are called the 5Cs of Credit.
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