Did you know that your finances go through an underwriting process before your loan? Your loan can’t get to closing until your lender’s team completes the underwriting process for your mortgage. Bank and other lenders analyze the reasons for the requested borrowing along with your finances. This process is carried out by a commercial loan underwriter. The loan underwriter ensures that the borrower/borrower’s business has a reasonable potential to successfully repay the borrowed money. The lender or underwriter simply verifies your flow of income, assets, debt, and other property details to issue final approval to your loan request. You may also be asked to provide additional information such as the proof of additional assets.
Commercial loan underwriting is a structured flow of processes. The loan underwriter generally carries out the analysis about:
1. Background Check
The underwriter will want to dive into your business’s credit history and pull your credit report. Your credit score can paint a decent picture of your financial ethics. In your overall credit score, they search for any late payments, bankruptcies, overuse of credit, and more. They will also analyze how your business is expected to perform in future in the industry.
2. Repayment Ability/Debt to income ratio
Lenders sell their money for profits based on the timely repayments. Hence, they analyze how much you spend and how much income you bring in. Loan underwriters perform financial ratio analysis to compare the expected profits of your business with on-going loan payments. They can also question your income and employment situation. Also, the amount of business debt and business equity is also compared. How rapidly the business inventory is bought and sold also signifies the pace of loan repayment.
3. Security and other assets
Lenders look for adequate assets to use as security in case of business failure. The security can be personal guarantees of the owner or any external valuable assets like stocks, land, residential property, etc. The assets taken as security primarily also depend on the risk involved in money lending.
4. Order an appraisal
The underwriter will order an appraisal to ensure that the amount offered by the lender matches the actual value of your requirement. If the offered amount and required money do not match, the loan underwriter may ask you several questions related to your finance and spending behavior.
5. Verify your savings and down payment
The underwriter examines your savings account to make sure you have sufficient money in your bank account to supplement your income or make down payments or address any emergency. They also check for any past fraudulent activities related to finances or other sectors.
Commercial businesses require access to capital for many reasons like start-up of a business, growth and expansion, major asset acquisitions, on-going working capital, and much more. A loan underwriter examines your debts and compares them to your income to ensure enough cash flow to cover your monthly mortgage payments, taxes, and insurance. Banks and other lenders inspect loans in terms of the risks involved. Riskier loans require more security and hence heavy down payments, higher interest rates, and shorter periods of loan repayments. A potential buyer must be aware of all the loan underwriting criteria to have a smooth and successful money borrowing.