What is loan underwriting?

Loan underwriting refers to the critical process by which lenders assess the risk associated with granting a loan to a borrower. It involves a comprehensive evaluation of various factors, such as the borrower’s creditworthiness, income, employment history, and overall financial situation, as well as the value and condition of the property being financed.

The primary goal of underwriting is to determine whether the borrower meets the lender's criteria for loan approval and to establish the terms under which the loan will be granted. This process helps ensure that the lender is making a sound investment while providing protections against potential defaults. The underwriter ultimately decides if the loan will be approved or denied, based on the information gathered and analyzed during this phase.

In contrast, collecting loan payments pertains to the servicing of the loan post-approval, recording loan agreements involves documenting the legal terms of the loan, and the appraisal process is focused on assessing the market value of the property, which is a task often conducted before or during underwriting but is not the same as the underwriting process itself.