Think of a mortgage underwriter as if he or she was a member of the Queen’s Guard. Standing tall and holding steadfast, an underwriter ensures your bank or credit union uses strong fundamentals and guidelines to assess a mortgage’s quality and qualifications. He’s a gatekeeper protecting and determining who does or not receive a loan; essentially, it’s all in your underwriter’s hands. While a study conducted by the Office of the Controller of the Currency (OCC) at the end of 2015 showed that commercial underwriting standards eased at 30 percent of the 95 major banks surveyed and tightened at only 6 percent, underwriting is still a risky role that requires specific guidelines and responsibilities. Ultimately, banks need to be aware of what these guidelines are and what these easements might mean for the mortgage industry and their own financial institutions.
Since underwriting is in large part risk-based, underwriters typically have a set of guidelines that they use to assess a loan’s risk. This is where the underwriter will turn to what’s known as the three c’s: credit, capacity, and collateral. For credit, an underwriter will review how well (or unwell) a potential borrower manages current and prior debt. For capacity, an underwriter will consider things like debt ratios, cash reserves, and loan characteristics. Finally, for collateral, a borrower’s total equity is analyzed.
Loan Underwriting in Commercial Appraisals
In our extensive experience with commercial appraisals, the loan underwriting process is usually routed through a bank or credit union’s own underwriting department since the underwriter is traditionally an employee of the bank. While this all depends on the structure that the bank establishes internally, an underwriter can complete the underwriting, and then pass it along to an appraiser. This is done when the loan is at a point where the underwriter believes it will move forward toward closing. In these cases, the underwriter is sometimes even the one to coordinate the appraisal.
Clearly, an underwriter plays an important role in the appraisal and mortgage process. How then do you know what to look for in an underwriter? More than anything else an underwriter has to have a good understanding of real estate, cash flow analysis, and your bank or credit union’s internal credit policies. In addition to understanding your own internal policies, your underwriter should be aware of other regulations and guidelines that affect their role.
How Can Appraisers Help Underwriters?
As you investigate loan underwriting and the underwriting process, be aware of what appraisers can do to help underwriters. One idea is to include an executive summary that provides a clear and concise description of the property, borrower, qualifications and the loan request. Other helpful documentation includes things like profit-and-loss statements and even relevant digital photos. Finally, appraisers and banks alike can be prepared for the underwriter to ask for further information, but remember that in many cases, less is more. Be prepared with additional helpful documents, but avoid adding too much to the underwriter’s plate at the beginning. He’ll ask for more information if it’s needed.
Have more questions about the role of an underwriter? Let us know; we’re happy to chat all things appraisals.