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What is an 'Underwriter'

An underwriter is a company or other entity that administers the public issuance and distribution of securities from a corporation or other issuing body. An underwriter works closely with the issuing body to determine the offering price of the securities, buys them from the issuer, and sells them to investors via the underwriter's distribution network. Underwriters generally receive underwriting fees from their issuing clients, but they also can earn profits when selling the underwritten shares to investors.

BREAKING DOWN 'Underwriter'

Underwriters operate in many aspects of the financial world, most notably loan underwriters who underwrite mortgages and other common types of debt instruments. Underwriters are also a part of the initial public offering (IPO) process in the equity market, and are part of the insurance application process. Therefore, an underwriter is any entity that is responsible for evaluating and assuming another entity's risk, for a fee such as a commission, premium, spread or interest.

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. Mortgage loan underwriters ensure that a loan applicant meets all of these requirements, and they subsequently approve or deny a loan. Underwriters also review the property's appraisal to ensure that it's accurate and that the home is roughly worth the purchase price and loan amount.

Mortgage loan underwriters have final approval for all mortgage loans. Loans that aren't approved can go through an appeal process, but the decision requires overwhelming evidence to be overturned.

IPO Underwriters

An IPO is the process of selling shares of a previously private company on a public stock exchange for the first time. IPO underwriters are financial specialists that play a key role in a company's IPO process.

IPO underwriters are normally investment banks that have IPO specialists on staff. These investment banks work with a company to ensure that all regulatory requirements are satisfied. Next, the underwriter contacts a large network of investment organizations, such as mutual funds and insurance companies, to gauge investment interest. The amount of interest received by these large institutional investors helps the underwriter set the IPO price of the company's stock. The underwriter also guarantees a specific number of shares will be sold at that initial price and will purchase any surplus.

Insurance Underwriters

Insurance underwriters, much like mortgage underwriters, review applications for coverage and accept or reject an applicant based on risk analysis. 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. Additionally, insurance underwriters advise on risk management issues, determine available coverage for specific individuals, and review existing clients for continued coverage analysis.

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RELATED FAQS
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  3. How do I become an underwriter?

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  4. What does the underwriter do in a new stock offering?

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  5. When is an underwriting fee too high on a commercial loan?

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