Understanding the process while applying for the loan is tricky in many ways. Be it the average person or a business person; both don’t know what the entire process of loan requires. The process of loan sanctioning can be understood clearly with the loan underwriting. This blog will give insight into what underwriting is and what things are required for the loan underwriting process.
The business loan underwriting process will determine the financial health of the potential borrower. It even verifies whether the borrower is meeting all the criteria which are required to grant the loan. The loan underwriting process involves everything from checking the business and financial documents along with the growth plan of the borrower.
Method to follow for Loan Underwriting
Most banks and financial institutions have the pool of experienced loan underwriters who are required to analyze all the information submitted by the potential borrower. The guideline that is followed by the loan underwriter to assess the information presented by the borrower is:
- First, analysis of the credit profile of the borrower.
- Verify the financial status of the borrower by checking monthly, annual income along with the existing debts and other expenses.
- Evaluate the monthly expenditure of the borrower.
- At last, analyze whether the borrower is capable of paying the EMI of the loan.
Once the assessment is completed, the recommendation is made against the Small Business loans amount requested by the borrower. The loan underwriting process will give the financial institution insight into the personal and financial status of the potential borrower.
What is the time of loan Underwriting?
It can take up to a few days to several weeks for completing the process of loan underwriting. The time can vary from borrower to borrower depending upon the request for verification by the financial institution.
Loan Underwriting Ratio
Certain ratios are used to evaluate whether the loan can be sanctioned to the potential borrower or not. The first ratio used in the loan underwriting process in USA is to compare the fair market value of the property by loan balance. Debt Service Coverage Ratio is another ratio that compares the total debt incurred with the total earning made by the borrower.
Digitalization of Loan Underwriting Process
With the digital revolution, the process of loan underwriting has been transformed digitally and uses the technology for assessing the potential borrower. Financial and insurance companies are evaluating the underwriting by using technology like robotics, analytics, and machine learning to enhance the efficiency and accuracy of the assessment. Things that financial organization need to keep in mind while digitalizing the underwriting process are:
- Tools and Services- Use business intelligence tools, and UW desktops as the underwriting tools along with its use platform and data provider, loss engineers as the service provider.
- Analysis of Data and Underwriting – Evaluating the amount of structured or unstructured internal and external data become simple and then can be organized for risk analysis.
- Underwriting Process – Large amount of external data is gathered from traditional submission or various channels. Automation and artificial intelligence and machine learning are used to handle and evaluate the risk.
New technology has a large number of tools, options, resources and advice that can be used by the underwriter to make their task simpler. However, there is no magical weapon that can solve all the challenges of the loan underwriting process in this digital era.