Underwriting is a common practice used in the commercial, insurance, and investment banking industries. An underwriter is any party that evaluates and assumes another party’s risk for a fee. It refers to a person or an organization that underwrites insurance policies or accepts responsibility for payment in the event of the public not taking the whole of the shares issued. Underwriters play a critical in many industries in the financial world, including the mortgage industry, insurance industry, equity markets, and some common types of debt security trading. During the underwriting process, they do everything from evaluating your health to assess your financial status.
“Underwriters assess, evaluate and assume the risk of another party for a fee. They work for a mortgage, insurance, loan, or investment companies.”
Underwriting happens after the down payment is made, but right before you close on a house. That means that the timing of this home loan process can be crucial, particularly if you want to move in by a certain date. This term originated from the practice of having each risk-taker write their name under the total amount of risk they were willing to accept for a specified premium.
In general, underwriters are tasked with determining the level of the risk, or the likelihood that an outcome or investment’s actual gains will differ from an expected outcome or return, for various different stakeholders. They work for a mortgage, insurance, loan, or investment companies. They assess, evaluate and assume the risk of another party for a fee. Each industry has its own underwriters and these individuals must understand the intricacies of their specific field.
Mortgage Underwriters – The most common type of underwriter is a mortgage loan underwriter. Mortgage loans are approved based on a combination of an applicant’s income, credit history, debt ratios, and overall savings. They must do a thorough risk assessment. Once an assessment is done, the underwriter can confirm if the loan is a manageable undertaking for the applicant.
Insurance Underwriters – Insurance brokers and other entities submit insurance applications on behalf of clients, and insurance underwriters review the application and decide whether or not to offer insurance coverage. They also assess individuals who are applying for life insurance policies. They determine if the contract is profitable for the insurer.
Equity Underwriters – In the equity markets, underwriters administer the public issuance and distribution of securities—in the form of common or preferred stock—from a corporation or other issuing body. Perhaps the most prominent role of an equity underwriter is in the IPO process.