Whether you’re applying for a personal loan, a line of credit or refinancing an existing loan, your application will likely go through underwriting. However, it’s not always clear what’s happening behind the scenes during the loan approval process. Understanding what underwriting is and knowing what factors may matter can help you feel more confident and prepared.
What is loan underwriting for personal loans?
Loan underwriting is the point in the application process where lenders review your information and decide whether or not you qualify and for what loan terms. This step helps determine the loan amount, interest rate and term length.
For personal loans, the underwriting process tends to focus on things like your credit score, payment history, monthly income, employment and debt-to-income ratio (DTI). Some traditional lenders like banks and credit unions may put a lot of emphasis on a borrower’s credit history. However, there are alternatives, like online lenders, who may be able to help those who have been turned down by the bank. They often consider your financial picture as a whole and focus on things like how steady your income is or how consistent you are with repayment. This flexibility can make personal loans more accessible to those with bad credit.
Why do loans go through underwriting?
Loans go through underwriting because it helps lenders make informed decisions about loan approval. It allows them to make sure that the loan amount and terms make sense for your unique financial situation. It protects both you and the lender by reducing the risk of nonpayment, and helps ensure that borrowers aren’t approved for credit that would put a strain on their personal finances.
What happens during the underwriting process?
The underwriting process will often look different from lender to lender. It may be a manual process or could be handled by a computer. Here’s what typically happens after you submit your loan application:
Reviewing the application. The first thing that typically happens is a check for any details missing from your application. If there is missing information or there are inconsistencies, the lender may reach out to you for clarification before proceeding.
Evaluating your creditworthiness. After reviewing and ensuring your application is complete, lenders will evaluate your creditworthiness. This can look different from lender to lender, but in general they’ll look at things like your credit report, credit score and payment history.
Verifying your income. Lenders may ask you to submit documentation like pay stubs, tax returns or bank statements to confirm your income and employment.
Evaluating debt-to-income. Another factor that can determine loan approval is how much debt you currently have. This could be credit cards, mortgage loans or other obligations. They’ll want to see how much of your income is already going toward paying off debt to make sure you can take on a new loan.
Decisioning. After reviewing all of the information and ensuring that you meet their eligibility requirements, the underwriter will decide whether or not to approve you for a loan. They will also determine things like amount, interest rate, term length and any other conditions tied to the loan.
How long does underwriting take?
How long the underwriting process takes varies based on a few factors. Some lenders can offer near-instant decisions while others may take a few days. One of the biggest differences comes down to whether the process is manual or automated.
Automated underwriting uses technology to quickly review your financial stability and make a decision in just a few minutes. Manual underwriting on the other hand relies on a loan officer or underwriter reviewing your full financial profile, which can take longer.
The timeline can also be impacted by how accurate your application is, and how quickly the documents were provided. If a lender requests additional documentation like bank statements or pay stubs, sending them promptly can help keep things moving.
What types of loans have an underwriting process?
Most loans go through underwriting, including personal loans, lines of credit, mortgage loans and car loans.
Personal loans. Most personal loans go through underwriting. It’s typically a simple process where the lender evaluates your creditworthiness by looking at your overall financial picture.
Lines of credit. Lines of credit go through a similar underwriting process as a personal loan, but the lender is evaluating how you will manage revolving credit. They may also do a regular review to see if your credit limit could increase.
Auto loans. Car loans also go through underwriting, but in addition to reviewing your personal finances they’ll look to verify there are no outstanding liens. They’ll also make sure the value of the vehicle aligns with the price or market value of the car.
Home loans or refinancing. The mortgage underwriting process is much more detailed. Leaders will review your credit, income, assets and debts when you apply for a new mortgage or a new loan to refinance. If you’re submitting a new mortgage application, your down payment may also factor in as it affects your loan amount.
How can you make the underwriting process smoother?
You can make the underwriting process smoother by being prepared with the necessary documents and paying careful attention when you fill out your loan application.
Double-check your application. When submitting a loan application, be sure to double-check your work and make sure the information you’ve included is correct. It can slow the process down if the loan processor has to contact you to verify information.
Gather your documents ahead of time. Lenders may request pay stubs, bank statements or other documents to verify your income or employment history. Having these ready to go when you apply can help speed up the process.
Avoid major financial decisions. Applying for new credit cards or making big purchases on credit while applying for a new loan can raise a red flag to financial institutions. If you can, try to wait to make any major changes.
Keep communication open. While the underwriter reviews your application, they may need to reach out for additional information or documentation. Responding quickly can help keep the process moving.
Final Thoughts
Underwriting is a standard part of applying for a loan. While it can seem complex, it’s designed to help match borrowers with the right loan amount and terms. By understanding what underwriters look for and preparing your documents and information in advance, you can make the process easier and more predictable.
DISCLAIMER: This content is for informational purposes only and should not be considered financial, investment, tax or legal advice.
