A credit underwriter reviews applications for new credit. Underwriters protect the interests of lenders by reviewing financial information provided by the applicant and credit agencies to determine whether the applicant meets the lender's criteria of a creditworthy borrower. Some people perceive underwriters as individuals who create obstacles for borrowers. In reality, lenders need to write loans to generate profits so underwriters are tasked with finding suitable borrowers rather than looking for reasons to reject applications. Underwriters usually rely on the four C's of credit when reviewing credit applications.
The underwriting process starts when the underwriter orders a copy of the loan applicant's credit report from at least one of the consumer credit bureaus: Equifax, Experian and TransUnion. These agencies also provide lenders with credit reports for businesses although many lenders obtain business credit information from a firm called Dun and Bradstreet. A credit report provides the underwriter with an overview of your character in terms of past borrowing habits. Late payments and delinquent debts are signs that you cannot handle your finances and these kinds of events reflect poorly on your character from an underwriting perspective. If you have a positive payment history, then you may fit the lender's profile of a creditworthy borrower.
You may have paid your bills on time in the past but an underwriter has to determine whether you can afford to take on any additional debt. Underwriters calculate your debt-to-income ratio by reviewing income documentation such as your tax returns and comparing your income level with your monthly debt obligations. Lenders typically have DTI limits that borrowers cannot exceed but underwriters usually have some leeway to make exceptions for people who have high DTI ratios but other compensating factors. A high DTI level may prove less of an issue if you earn $1 million per year as opposed to $10,000 per year because as a high earner you have more cash after paying your bills than a low earner with the same DTI ratio.
Underwriters have to use their discretion when determining whether the conditions are right for extending you credit. Lenders have to make sure that you intend to use the loan for a legal purpose and that the lender risks no adverse legal issues as a result of extending you credit. However, underwriters also have to take into account factors such as the overall state of the economy. If you run a business that relies heavily on tourism, an underwriter may have no problem approving your loan during an economic boom but could view you as a high risk borrower during a recession when consumers have less disposable income. Underwriters must decide not just whether the loan makes sense but if the loan makes sense for the lender at this time.
Most large dollar loans are secured by some form of collateral so that the lender can seize and sell the collateral if you default on the debt. The underwriter has to ensure that you own the collateral that you intend to secure the lien against. A lender cannot place a lien without the property owner's consent. The underwriter also has to determine the value of the property by ordering an appraisal. Liens are only truly meaningful if the property in question holds sufficient value to cover the the amount of the loan.
Some underwriters refer to "capital" as the fifth C of credit. If you have to pay closing costs or make a down payment, then the underwriter has to check your bank statements to ensure you have sufficient capital to cover those costs.
Having reviewed the various facets of the loan application, the underwriter has to decide whether to approve or deny the application. An underwriter can approve a loan even if you do not meet all of the lender's usual eligibility requirements if your application holds up well in other respects, such as if you have poor credit but very high income. Underwriters stand to lose their jobs if they constantly approve bad loans, but at the same time lenders need underwriters to approve a certain number of loans so as to make money. Therefore, successful underwriters have to make sound judgements.