A:

In a real estate transaction, the underwriter conducts research to ensure that the individual borrowing funds for the real estate purchase have represented him or herself truthfully, and to determine that the sale price of the home is congruent with its appraised value. From the analysis of this information, the underwriter decides how much risk the lender is willing to accept. More stringent underwriting standards were enacted following the bursting of the housing bubble in the mid-2000s, increasing the importance of the underwriter in real estate transactions.

The underwriter is responsible for determining the borrower's creditworthiness. This rating represents the potential borrower's ability to pay back the funds lent, and it is determined by the credit scores provided by the three major bureaus, the amount of funds the borrower has in reserve, and the employment history of the loan applicant. The underwriter uses this information both to approve the loan and to determine the rate at which the money is lent. If a loan applicant has poor credit history, the underwriter has the ability to decide to lend to borrowers if they have strong employment histories and can increase their down payments. The loan may also be offered at a higher mortgage rate.

A property's appraised value is also scrutinized by the underwriter. When applying to borrow funds for a real estate purchase, a borrower is required by the underwriter to have an appraisal conducted on the property she intends to purchase. The underwriter uses the appraised value to determine if the funds garnered from the sale of the property would be enough to cover the amount borrowed. For example, if a borrower seeks to purchase a home for $300,000 that an appraisal deems to be worth $200,000, the underwriter is unlikely to approve the loan.

RELATED FAQS
  1. What is real estate underwriting?

    See how underwriters for major lenders scrutinize real estate loans and manage their risk, and learn the origin of the term ... Read Answer >>
  2. How does insurance underwriting differ from investment underwriting?

    Understand the difference between insurance underwriting and investment underwriting, including what types of risks an underwriter ... Read Answer >>
  3. What are examples of risks for all underwriter types?

    Learn about the risks faced by different types of underwriting activity. Explore specific examples of risks faced by insurance ... Read Answer >>
  4. What does the underwriter do in a new stock offering?

    Learn the role an underwriter plays for an initial public offering, and the steps an underwriter takes in preparing for an ... Read Answer >>
  5. How is something "brought over the wall" in an investment bank?

    An analyst who lends his or her expertise to an underwriting department is said to have been "brought over the wall". In ... Read Answer >>
Related Articles
  1. Insurance

    What Prequalification and Underwriting Do

    Learn now prequalification and underwriting can help you buy the policy that best meets your needs.
  2. Investing

    How To Challenge A Low Home Appraisal

    If you're unhappy with your home appraisal, here are some steps you can take.
  3. Insurance

    What is a Greenshoe Option?

    A greenshoe option is a provision in an underwriting agreement that allows the underwriter to buy up to 15% of the shares in an IPO at the offer price.
  4. Investing

    Find the Right Home Appraiser: A Quick Guide

    Locating the best home appraiser can mean a house valuation that's thousands of dollars higher than one that's done on the cheap.
  5. Managing Wealth

    The Home Appraisal: Your Key to a Successful Refinance

    When you refinance your mortgage, everything hinges on the appraisal. Here's what appraisers look at, how to make your home look as valuable as possible and ways to fight back if the valuation ...
  6. Insurance

    What Does an Underwriter Do?

    In the investment world, an underwriter is a company that helps corporations or other issuing bodies distribute their securities.
  7. Investing

    The Home Appraisal: Key To A Successful Refinance

    An appraisal is a professional’s assessment of a home’s value that ensures banks don’t lend more money than a property is worth.
  8. Managing Wealth

    7 Ways To Increase Your Home's Appraisal Value

    When it's time to sell your home – or refinance – it will need to be appraised. Here's how to make sure the valuation is as high as possible.
  9. Investing

    How Much Do Home Appraisers Make?

    Experience and training can create a high-paying career as a home appraiser, despite competitive pressures and a high level of government regulation.
  10. Investing

    6 Tips For Protecting Your Home's Value

    New taxes, property values, appraisals, community changes and nearby abandoned foreclosures can all lower your home's value. Take proactive steps to protect it.
RELATED TERMS
  1. Underwriter

    An underwriter is a company or other entity that administers ...
  2. Underwriting Fees

    Underwriting fees are monies collected by underwriters for performing ...
  3. Automated Underwriting

    A computer-generated loan underwriting decision. Using completed ...
  4. Underwriting Agreement

    A contract between a group of investment bankers who form an ...
  5. Underwriting Income

    Profit generated by an insurer's underwriting activity over a ...
  6. Negotiated Underwriting

    A process in which both the purchase price and the offering price ...
Hot Definitions
  1. Time In Force

    Time in force is a special instruction used when placing a trade to indicate how long an order will remain active before ...
  2. Retirement Planning

    Retirement planning is the process of determining retirement income goals and the actions and decisions necessary to achieve ...
  3. Drawdown

    The peak-to-trough decline during a specific record period of an investment, fund or commodity. A drawdown is usually quoted ...
  4. Inverse Transaction

    A transaction that can cancel out a forward contract that has the same value date.
  5. Redemption

    The return of an investor's principal in a fixed income security, such as a preferred stock or bond; or the sale of units ...
  6. Solvency

    The ability of a company to meet its long-term financial obligations. Solvency is essential to staying in business, but a ...
Trading Center