What Is Underwriting?

Underwriting is the lender’s process of verifying risk and compliance before committing funds.  It’s not just a formality—it’s the critical step that determines whether your loan closes or stalls.  The underwriter’s job is simple in theory: confirm that the loan makes sense for both the Borrower and the lender.  In practice, it’s a detailed, multi-layered review.

Why Underwriting Exists

Lenders face two significant risks:

• Credit risk: Will the Borrower repay the loan?
• Collateral risk: Is the property worth what we think it is?

Underwriting mitigates these risks by validating every assumption in the loan file.  It ensures the lender complies with internal guidelines, investor requirements, and regulatory standards.

Takeaway: “Underwriting isn’t a hurdle—it’s the safety net that makes funding possible.”

The Core Functions of Underwriting

Underwriting typically covers four major areas:

1.  Borrower Analysis

• Credit History: Pulls credit reports to assess payment patterns.
• Income verification: Reviews tax returns, W-2s, or business financials.
• Liquidity and reserves: Confirms the Borrower can handle closing costs and unexpected expenses.

Example:

A Borrower applying for a $2M commercial loan shows substantial income but limited liquidity.  The underwriter requires an additional $100K in escrow before approval.

2.  Property Review

• Appraisal: Orders an independent valuation to confirm market value.
• Title report: Checks of ownership, liens, and encumbrances.
• Condition assessment: For commercial properties, reviews deferred maintenance and structural integrity.

Example:

Underwriting discovers a recorded easement on a property that could affect future development.  The lender adjusts terms to account for potential limitations.

3.  Risk Assessment

• Protective equity: Ensures loan-to-value (LTV) ratios meet guidelines.
• Debt Service Coverage Ratio (DSCR): For income-producing properties, verifies that NOI covers debt obligations.
• Environmental risk: Requires a Phase 1 Environmental Site Assessment for commercial deals.

Example:

A Phase 1 report reveals minor soil contamination—underwriter conditions approval on remediation and escrow holdback.

4.  Compliance and Documentation

• Confirms all documents are signed, complete, and consistent.
• Reviews of entity formation documents for LLCs or corporations.
• Ensure loan terms comply with state and federal regulations.

The Underwriting Timeline

Underwriting can take 5–15 business days, depending on:

• Complexity of the property
• Speed of Borrower responses
• Third-party reports (appraisal, environmental)

Pro Tip: Delays often occur because Borrowers don’t provide the requested documents promptly.  Brokers should set expectations early to build trust and confidence in the process.

Common Conditions for Approval

Underwriters rarely issue unconditional approvals.  Instead, they provide a conditional commitment with requirements such as:

• Updated financial statements
• Proof of insurance
• Repairs or reserve allocations
• Additional guarantors

Example:

A lender approves a $5M industrial property loan on condition that the Borrower funds a $200K reserve for roof replacement.

How Brokers Can Streamline Underwriting

• Submit a complete file: Missing documents slow everything down.
• Anticipate lender questions: Address weaknesses upfront.
• Communicate clearly: Keep the Borrower informed about timelines and conditions.

Takeaway: “A clean file isn’t just good practice—it’s your ticket to faster approvals.”

Underwriting for Commercial vs. Residential Loans

• Residential: Focuses on the Borrower’s credit, income, and property value.
• Commercial: Adds layers—NOI analysis, DSCR, tenant rollover risk, environmental compliance.

Example:

For a retail center loan, the underwriter reviews leases, assesses tenant creditworthiness, and analyzes market vacancy trends before approving the loan.

What Happens After Underwriting?

Once conditions are met, the file moves to closing:

• Loan documents are drafted.
• Funds are scheduled for disbursement.
• Escrows and reserves are finalized.

Recap

• Underwriting = lender’s risk and compliance review
• Covers Borrower, property, risk, and documentation
• Orders appraisal, title, and environmental reports
• Issues conditional approval with requirements
• Brokers can speed the process with complete files and proactive communication.

Conclusion: Underwriting Is Your Ally

Underwriting isn’t designed to frustrate—it’s meant to protect both parties.  Knowing its purpose helps Borrowers feel more in control and less anxious about the process.

Takeaway: “Underwriting isn’t the enemy—it’s the gatekeeper to a successful loan.”