What is Underwriting in Real Estate?: #1 Detailed Overview

For those asking the question, “What is underwriting in real estate?” we’ve got the answers. Look below to find out exactly what real estate underwriting is, what the process entails, and how to make it as easy as possible.

Main Takeaways:

• Underwriting in real estate is basically a borrower screening process. Lenders undergo an extensive background and eligibility check, including inspecting your financial records and property valuation.
• You can make the underwriting process simpler by being honest and quick to respond to lender questions and concerns, as well as keeping your financial standing consistent during the checkup period.

Table of Contents

• What is Underwriting in Real Estate?
• What Does an Underwriter’s Process Involve?
• How Long Does Real Estate Underwriting Take?
• How to Make Your Experience Easier

What is Underwriting in Real Estate?

Underwriting in real estate can be defined as the borrower screening process. In real estate underwriting, lenders determine how risky it would be to lend to a borrower. They want to see how feasible your investment and ability to repay a loan are. By that same token, they seek to ascertain whether they’d be protected in case the loan was to default.

Lenders, like Baltimore hard money lenders, do this by examining your financial background, as well as your real estate assets and history. Then, they decide whether or not to move forward with your application.

What Does an Underwriter’s Process Involve?

In real estate underwriting, underwriters undergo extensive borrower background and loan eligibility checks. In addition, they also calculate the loan amounts, terms, and interest rates your property qualifies for. To do this, they look through:

• Your Business History: Your real estate, employment, and financial histories to gauge your reliability, truthfulness, and proven experience. For instance, they may reach out to your employer as proof of employment. Also, they may ask to see your paystubs, W2s, leases, bank accounts, stocks, and other documents and assets.
• Your Credit Report and Score: Again, underwriters want to see that you have an experienced, reliable history. Traditional lenders may require higher scores, while asset-based lenders may only ask for scores in the high 500s or low 600s. Furthermore, asset-based lenders may excuse a lack of experience if you show a well-thought-out plan that shows your foresight and business abilities.
• Your Ability to Pay Off Your Loan and Down Payment: They find this by looking at your debt-to-income ratio, savings, and how consistent your income streams are.
• Title: Your title (ownership) of the property.
• Appraisal: As one of the most critical steps, they will want to go through an appraisal process. Here, they’ll check your property’s value, or what its value would be after repairs, as collateral. They also will ensure the property’s value is enough to cover your possible loan amount. Doing this can involve an on-site property inspection and comparison to similar properties.
• Property Profitability: How profitable and costly your property project will be once it’s done. Put another way, how good your property would be at offsetting your loan payments once all its operating expenses are cleared. For example, if you are redoing a rental property, they will want to make sure it attracts enough tenants to provide consistent cash flow after the repairs.
• Barriers to Repayment: Any barriers you might face towards finishing the project or repaying your loans. These could include legal issues, local and national market volatility, structural property problems, or environmental dangers (like hurricanes) that threaten your property.

Generally, traditional lenders give you a final eligibility rating based on your credit score. On the other hand, with asset-based lenders, like hard money lenders, eligibility can be more flexible. As the name would have it, eligibility for such loans is largely based on your assets. Like an investment property, for instance.

On a related note, real estate underwriting doesn’t completely end at the approval stage. Throughout the loan term, underwriters may continually check for any obstacles you face that could impact your loan’s full repayment. For example, they may keep an eye out for financial planning or income challenges, as well as project quality or scheduling issues.

How Long Does Real Estate Underwriting Take?

When it comes to real estate underwriting, timeframes can vary. They can take a few days to a few weeks. To speed up the real estate underwriting process, you should get all your ducks in a row. Ahead of time, make sure your documents are all ready and accurate.

How To Make Your Experience Easier

Underwriting in real estate can go two ways—it can go smoothly, or it can have several speedbumps. Your honesty, pre-planning, and communicativeness can make or break it, so be sure to follow these tips.

Honesty is the Best Policy

Underwriting in real estate is all about verification of your trustworthiness and financial worthiness. So, if you were to falsify or hide any parts of your background, it would raise big alarm bells in an underwriter’s head. To boot, even if you try to obscure some facts, underwriters may still be able to find that information. So, don’t make this mistake.

This tip may sound glaringly obvious, but you would be surprised at how many people attempt to sneak problems past the radar.

Although it may be difficult, it’s best to always be honest and transparent. Even if doing so shows you’re not perfect, you show openness and integrity to your lender. Needless to say, that can go a long way toward making you stand out.

To make such roadblocks go more smoothly, you could proactively explain any gaps or issues in your records. This way, your underwriter better understands why they happened.

Answer Questions Quickly

The real estate underwriting period is the prime time when you’ll want your phone off silent mode. Your lender will undoubtedly need to ask you questions or request certain documents throughout the process. The later you respond, the more you delay the real estate underwriting process. Even worse, the less reliable you might appear.

Don’t Drastically Change Your Finances During the Process

Whether you want to get another loan, line of credit, or big purchase, doing so can jumble the exact thing underwriters are analyzing—your financial standing. So, you should put any of these plans on pause until the dust settles on your current loan application.

Get an Easy Real Estate Underwriting Experience with MHML

Underwriting in real estate can go easier when you come in prepared and open throughout the whole process. Your lender simply wants to make sure your loan would be a good fit for both parties, so you should help them help you.

If you want your real estate underwriting process to go quickly and painlessly, we can help. Our team works overtime to make the process finish as soon as possible. After all, we have been on the other side of the investing fence, and we know you have urgent projects that need funding immediately.

And not only that. We’re a private, local lender. As such, we can offer customizable terms that meet you where you are. Even if your financial history isn’t ideal or you’re not the most experienced in real estate, we’ll still consider you. We’ll always work to turn your vision into reality. So, call us today to get your project on the ground running.