Loan Underwriting: A Complete Guide

Not all lenders are created equal, but there are certain areas of the lending process they have in common.

Underwriting is one of them. This process helps lenders understand their customers and their risk status to safeguard against unexpected loss.

In this guide, we'll help you understand what underwriting is, the different types of underwriting lenders perform (consumer, business, loan, etc.), the difference between manual and automated underwriting, the steps in the underwriting process, and what lenders look for.

What is underwriting?

Underwriting is a lender’s process of evaluating and managing risk. Through underwriting, banks and other financial services providers carefully review a borrower’s credit history and financial background to determine their eligibility for a loan.

Once a borrower submits a loan application and it’s accepted, the underwriting process kicks in. The credit underwriter assesses the borrower’s finances and past credit decisions to give them an overview of their degree of risk. Underwriters use this information to make loan decisions, determining whether the borrower's risk profile meets the lender's criteria for approval.

For example, when a borrower applies for a home loan, the lender will rely on underwriting to evaluate the application and determine whether to approve or reject the mortgage. If you operate an investment bank, underwriting can help you raise money for a client, like in an initial public offering (IPO).

Types of underwriting lenders perform

Some of the main types of underwriting lenders perform include:

• Mortgage underwriting: With mortgage or home loans, the mortgage underwriter is the professional responsible for evaluating the applicant’s finances, looking at their credit score, credit and income history, employment situation, and other details to assess the financial risks and rewards of approving the application. Refinancing a mortgage loan also requires underwriting.
• Auto Loan Underwriting: For auto loans, lenders evaluate the borrower’s credit history, income, employment status, and the value of the vehicle being financed. Car loans are assessed based on credit history and are a key part of creditworthiness assessment for both auto financing and broader loan applications.
• Personal Loan Underwriting: Personal loans are typically unsecured, so lenders heavily rely on the borrower’s credit history, income, and debt-to-income ratio to assess risk. Underwriters review open accounts and payment history as part of the credit evaluation process.
• Business Loan Underwriting: Business lenders assess the creditworthiness of businesses seeking financing. This can include a review of the company’s financial statements, business plan, credit history, and the owner’s personal credit and financial stability.
• Credit Card Underwriting: Credit card issuers use a combination of credit history, income, and other factors to determine credit limits and interest rates for cardholders. Along with other credit products like mortgages, auto loans, and student loans, credit card issuers use credit reports to assess borrower risk. Underwriters also review open accounts and payment history as part of the credit evaluation process.
• Commercial Real Estate Underwriting: This type of underwriting evaluates the creditworthiness of businesses or investors seeking loans for commercial real estate properties. Lenders assess the property’s income potential, the borrower’s financial stability, and the economic viability of the project.
• Insurance Underwriting: In the insurance industry, underwriters evaluate risks associated with insuring individuals, businesses, or assets. They assess factors like health, age, occupation, and property conditions to determine insurance premiums and coverage. Underwriters assess risk to determine eligibility and pricing for an insurance policy.
• Securities underwriting: Prior to taking a company public via direct listing or IPO, banks and special purpose acquisition companies initiate securities underwriting. The goal is to determine the asking price for securities or the actual value/worth of the company shares. Here, the risk assessment is done for the investor — not on behalf of the company — so lenders have little control.

You can also think about underwriting from the perspective of who is being evaluated: a business or a consumer.

Consumer Underwriting

Consumer underwriting is the process by which lenders, financial institutions, and credit providers assess the creditworthiness and risk associated with individual consumers who are applying for credit or loans.

The primary goal of consumer underwriting is to make informed decisions about whether to extend credit to a particular consumer and, if so, on what terms (interest rates, credit limits, repayment schedules, etc.). Here are some key aspects of consumer underwriting:

1. Income Verification: Lenders typically require consumers to provide proof of income as part of the underwriting process. This helps determine if the applicant has a stable source of income to repay the loan or credit. Documentation may include pay stubs, tax returns, or bank statements. Lenders may also request additional documents to verify or clarify information during the underwriting process.
2. Debt-to-Income Ratio: Lenders calculate the debt-to-income (DTI) ratio to assess a consumer’s ability to manage additional debt. This ratio compares the consumer’s monthly debt payments to their monthly income. A lower DTI ratio indicates a lower level of debt relative to income, which is generally seen as more favorable.
3. ‍Employment and Stability: Lenders often consider an applicant’s employment history and stability. A stable employment record can be a positive factor in the underwriting process, as it suggests a consistent source of income.
4. ‍Other Financial Information: Lenders may consider various other factors, such as the consumer’s savings, assets, and expenses, to gain a more comprehensive view of the applicant’s financial situation.‍
5. Regulatory Compliance: Lenders are required to comply with various consumer protection laws, such as the Truth in Lending Act and the Equal Credit Opportunity Act, which prohibit discrimination and ensure transparency in lending practices.‍
6. Risk Assessment: Based on the information collected and analyzed during the underwriting process, lenders assign a risk level to the applicant. This risk level helps determine the terms and conditions of the credit being offered, such as interest rates, credit limits, and repayment schedules. Important factors in the approval process include credit history, and it is advisable for applicants to be transparent about any missed payment or adverse financial events, as this helps underwriters better evaluate creditworthiness and can facilitate a smoother approval process.

Consumer underwriting aims to strike a balance between providing access to credit for consumers who can manage it responsibly while managing the lender’s risk exposure. The specific criteria and scoring models used in the underwriting process can vary among lenders and financial institutions, but they all aim to make data-driven decisions that align with their risk tolerance and lending policies.

Business Underwriting

Business underwriting is the process by which lenders and financial institutions assess the creditworthiness and risk associated with businesses applying for loans or credit. 

This process is critical for evaluating the financial health, stability, and repayment capacity of businesses seeking funding for various purposes, such as expansion, working capital, equipment purchase, or real estate investment. Here are some key aspects of business underwriting:

1. ‍Financial Statements: Lenders typically require businesses to provide financial statements, including balance sheets, income statements, and cash flow statements. These documents offer insights into the company's financial performance, profitability, and liquidity. Lenders analyze key financial ratios to assess the business's ability to meet debt obligations.
2. ‍Business Plan: In some cases, especially for startup businesses or those seeking substantial financing, lenders may request a detailed business plan. This plan outlines the company's objectives, strategies, market analysis, and financial projections, providing a comprehensive view of the business's viability.
3. ‍Personal Guarantees: In many cases, especially for smaller businesses or startups, lenders may require personal guarantees from the business owners or principals. This means that the owners are personally responsible for repaying the debt if the business cannot.‍
4. Business Stability: The length of time a business has been operating and its track record of success can play a significant role in underwriting. Lenders typically favor businesses with a history of stable operations.‍
5. Debt Service Coverage Ratio (DSCR): Lenders calculate the DSCR, which measures the business's ability to cover its debt payments. It's the ratio of the business's net operating income to its debt obligations. A higher DSCR is typically viewed as more favorable.‍
6. Regulatory Compliance: Lenders must adhere to various laws and regulations, including the Equal Credit Opportunity Act and the Community Reinvestment Act, to ensure fair and responsible lending practices.

Business underwriting aims to determine the risk associated with lending to a business and to set appropriate terms and conditions. The specific underwriting criteria and risk assessment methods can vary among lenders, and they use this information to make informed decisions about whether to extend credit to a business and on what terms.

There are two ways lenders underwrite their customers' loans: manually or automatically. Let's review these two methods next.

Manual vs. automated underwriting: What's the difference?

Credit underwriters used to employ manual underwriting methods to assess borrowers' creditworthiness. This involved reviewing an applicant's financial situation and other pertinent details to decide whether to approve or deny the loan.

As more consumers borrow loans, regulations also changed, which had an immediate and large impact on the underwriting process. Lenders and credit bureaus centralized their processes. Computers were also readily available, offering new insights for lenders to make more complex and profitable decisions at scale.

With more data and computing power, lenders have a complete picture of borrowers' creditworthiness and can automate the underwriting decision-making process.

The result? Improved workflows and increased customer satisfaction.

A Global Insights Report by Experian shows most businesses say investing in digital decisioning software is the best way to improve engagement and customer acquisition. In addition, business owners plan to invest in artificial intelligence (AI) and increase their staff's digital capabilities.

From the report, 60% of businesses plan to increase their budget for credit risk analytics, which AI and machine learning (ML) offer. This helps lenders by:

• Streamlining the underwriting process
• Giving them a clearer view of a borrower's creditworthiness
• Improving credit risk management and decisioning
• Increase operational efficiency
• Grow revenue
• Provide a positive customer experience

Automated underwriting is faster than manual methods, which rely on human effort to sift through and evaluate volumes of individual loan applications and financial statements. However, automated systems are also limited in unique borrower circumstances, such as varied incomes, in which case manual underwriting makes it easier for the lender to qualify a borrower.

An underwriting survey by Accenture, in partnership with The Institutes, found that underwriters use technology for better decision-making. 46% of those surveyed say it has positively impacted automation or elimination of non-core tasks. They also feel technology may cause more harm despite it boosting their speed to quote, access to knowledge, and ability to handle larger amounts of business. 

Lenders looking to gain a competitive edge use a combination of manual and automated underwriting methods (like the Fannie Mae Desktop Underwriter) to gauge a borrower's loan eligibility and financial risk.

Whenever an automated system flags a borrower's application, a human loan officer will review and analyze it again to determine the best approach.

Use Inscribe to automate underwriting

Check out the video below to see how banks, lenders, and fintechs use Inscribe to flag bank statements and pay stubs for signs of fraud and then parses the document to surface key cash flow insights for loan underwriting.

What are the steps in the underwriting process?

Bank underwriting will differ from company to company and depend on the type of loan.

For instance, underwriting a personal loan would differ from that of a mortgage, which includes extra steps like appraisal and title search, and insurance to determine how much to lend the borrower. During the mortgage process, the appraised value of the property is compared to the loan amount to determine if the loan can be approved. Underwriters also review property details to verify the collateral and ensure all relevant information about the home is considered. Additionally, the purchase price of the home is compared to the appraised value, which may affect negotiations or loan approval if the appraisal comes in lower than the purchase price.

However, lenders follow similar strict underwriting guidelines, which may be accompanied by computer models for loan and risk analysis.

Typically, the underwriting process follows these steps:

• Screening: Once a borrower submits their loan application, a loan officer screens the documents for creditworthiness before turning it over to the underwriter. This involves credit checks and a review of the applicant’s business finances.
• Underwriting: The loan officer sends the application to an underwriter who double-checks it to get all the information they need for underwriting analysis. This is a deeper dive than the initial assessment by the loan officer because the underwriter determines whether to approve or reject the application. They’ll also appraise the borrower’s business to know if they can afford to repay the loan and set a risk value for the company.
• Loan approval, suspension, or denial: Based on the underwriter’s report and recommendations, the lender will approve, suspend, or deny the borrower’s loan application. If approved, the lender takes on the risk and stipulates the loan and repayment terms. If suspended or rejected, the underwriter may ask for more information to make a more informed decision. And if rejected, the lender won’t take on the risk and denies the application altogether.

At the end of the process, borrowers should be prepared for closing costs, which are required at the final stage of home loan approval.

What do underwriters look for in a loan application?

When reviewing loan applications, most lenders focus on three primary concerns:

• Credit: Underwriters review the borrower's credit report to see how they've handled debt repayment in the past. To determine the best type of loan and interest rate for the borrower, they'll check to see how much credit the applicant has taken on, the loan terms, and any red flags in their credit history.
• Capacity: The underwriter also reviews the applicant's loan repayment ability, comparing their income against recurring debts to compute a debt-to-income ratio. They'll also consider IRA accounts, 401(k), tax returns, W-2 forms, pay stubs, and bank statements to ensure there's enough money to make a down payment and cover future mortgage payments.
• Collateral: A review of the applicant's collateral will help hedge the lender's bet in case the borrower defaults on the loan.

Underwriters fact-check all these details to ensure the borrower's financial picture and documentation are accurate, while verifying they meet all requirements of the loan program. Once underwriters review all the paperwork and information they need, they'll give the lender their risk analysis and recommendations.

How can lenders ensure a smooth underwriting process?

From Accenture's survey, the challenges impacting underwriters' ability to achieve business goals are:

• Inefficient processes
• Outdated systems
• Lack of information or analytics at the point of need
• Poor underwriting information access or organization
• Insufficient focus on talent development or training

Thanks to AI and ML technology, lenders can not only automate their lending workflows and processes, but also improve document collection, detect fraud, and reduce losses.

In fact, 32% of Accenture's survey respondents described AI, natural language processing (NLP), and robotics as superior tools for the underwriting process. And in the next three years, 71% of businesses will invest in predictive analytics, 67% in new underwriting platforms, and 67% in business intelligence and reporting tools.

These numbers underscore the need for underwriting software in the lending process.

Underwriting and risk assessment

Risk assessment is at the heart of the underwriting process, whether you’re applying for a mortgage, car loan, or another type of credit product. In mortgage underwriting, the underwriter’s primary responsibility is to assess the financial risk of lending to a particular borrower. This involves a thorough review of the applicant’s credit history, debt-to-income ratio, and overall financial background.

During the mortgage underwriting process, the underwriter examines the borrower’s credit report for patterns of responsible credit use, such as on-time payments and manageable debt levels. They’ll also analyze recent bank statements, pay stubs, and other financial documents to verify income, cash flow, and the ability to handle future debt payments. Other factors, such as employment status and the current market value of the property, are also considered to ensure the borrower can meet the loan terms.

By carefully evaluating all these elements, underwriters help lenders make informed decisions about loan approval, manage financial risk, and maintain a healthy lending portfolio. This thorough risk assessment is essential for both protecting the lender and ensuring borrowers are set up for success.

The underwriting timeline

The underwriting timeline can vary depending on the type of loan, the lender’s processes, and the complexity of the borrower’s financial situation. For most mortgage loans, the underwriting process typically takes between 30 and 45 days from the time the loan application is submitted. However, this timeline can be extended if the underwriter requests additional documentation, such as updated pay stubs, bank statements, or clarification on certain financial details.

Throughout the underwriting process, the underwriter will review the borrower’s credit report, loan application, and supporting documents to assess creditworthiness and verify all information. Delays often occur when required documents are missing or incomplete, or if there are discrepancies that need to be resolved. To ensure a smooth underwriting process, it’s important for borrowers to respond quickly to requests for additional documentation and to work closely with their loan officer and loan processor.

Common underwriting mistakes

Even small mistakes during the underwriting process can lead to delays or even jeopardize loan approval. One of the most frequent issues is submitting incomplete or inaccurate documentation. Borrowers should double-check that all required documents—such as pay stubs, bank statements, and tax returns—are up to date and accurate before submitting them. Missing or outdated paperwork can slow down the process and prompt requests for additional documentation.

Another common mistake is failing to disclose additional debt, recent credit inquiries, or changes in employment status. Underwriters rely on a complete picture of the borrower’s financial situation to make informed decisions. Omitting information about new loans, credit cards, or other financial obligations can raise red flags and may result in a denied application or a request for further clarification.

Sometimes, underwriters may ask for letters of explanation or extra income verification to resolve discrepancies in the documentation. Being transparent and responsive to these requests is essential for a smooth underwriting process. Working with an experienced loan officer and loan processor can also help identify potential issues early, ensuring that all necessary information is provided and that the loan application moves forward without unnecessary setbacks.

By staying organized, honest, and proactive, borrowers can avoid common underwriting mistakes and improve their chances of a timely loan approval.

How Inscribe helps with loan underwriting

Modern underwriting demands speed, accuracy, and confidence—especially in a digital-first lending environment where decisions need to be made quickly and with minimal risk. Inscribe helps lenders meet these expectations by automating some of the most manual and error-prone parts of the underwriting process.

Automating document review

One of the most time-consuming steps in underwriting is collecting and reviewing borrower documents—particularly bank statements. Inscribe dramatically accelerates this process with:

• Automated bank statement parsing: Inscribe extracts key financial details from submitted bank statements, including transaction histories, balances, and deposit patterns.
• Intelligent document checks: The platform flags incomplete, low-quality, or duplicate documents that might otherwise slow down or compromise the review process.
• Document tampering detection: Using AI-driven forensic analysis, Inscribe detects whether a document has been altered—such as fake balances, edited transactions, or other signs of manipulation.

This enables lenders to make faster decisions without compromising accuracy or increasing exposure to risk.

Identifying risk signals

Inscribe doesn’t just extract raw data—it highlights signals that help underwriters assess credit risk more efficiently.

For example, it can flag:

• Unusual transaction behavior (e.g., frequent overdrafts, round-dollar deposits)
• Inconsistent cash flow patterns
• Large or unexplained deposits that may require verification

These insights help lenders identify potential issues early in the process and focus human attention on higher-risk applications.

Streamlining the underwriting workflow

Inscribe is designed to integrate directly into underwriting workflows, helping teams move faster while maintaining control and compliance. It supports:

• Pre-screening of loan applications by validating submitted documentation and surfacing potential issues before they reach an underwriter.
• Improved throughput for underwriting teams by reducing time spent on document review and manual data entry.
• Human-in-the-loop collaboration, where flagged documents or high-risk cases are escalated for further analysis.

Strengthening fraud detection

Fraudulent documents remain one of the most significant risks in underwriting.

Inscribe is specifically built to tackle this challenge by:

• Detecting common types of document fraud, such as fake templates, altered numbers, and mismatched metadata.
• Providing transparency and confidence in data accuracy through a detailed audit trail of each document’s verification results.

Measurable impact

Lenders using Inscribe have reported:

• Significant reductions in time-to-decision for both consumer and business loan applications.
• Hundreds of hours saved per week through automation.
• Greater confidence in fraud prevention, particularly for applications that rely heavily on submitted bank documents.

Sound like a solution for your workflow? Talk to an Inscribe expert today.

Frequently Asked Questions (FAQs)

1. What is loan underwriting and why is it important?
Loan underwriting is the process lenders use to assess a borrower's creditworthiness and financial risk. It’s critical because it helps lenders determine whether to approve or deny a loan, and under what terms.

2. What are the main types of underwriting in lending?
Lenders commonly perform consumer, business, mortgage, personal, auto, and commercial real estate underwriting. Each type evaluates financial information differently depending on the loan’s purpose and structure.

3. What’s the difference between manual and automated underwriting?
Manual underwriting involves a human reviewing documents and making decisions, while automated underwriting uses software to evaluate borrower data. Many lenders use a hybrid model to balance speed and accuracy.

4. How long does the underwriting process take?
Underwriting timelines vary by loan type and lender. Mortgage underwriting, for example, typically takes 30–45 days but may be faster with automation tools like Inscribe.

5. What documents are typically required for underwriting?
Borrowers usually need to submit bank statements, pay stubs, tax returns, and employment verification. Business underwriting may also require financial statements and a business plan.

6. What does an underwriter look for in a loan application?
Underwriters evaluate a borrower’s credit history, income stability, debt-to-income ratio, and collateral to assess risk and determine loan eligibility.

7. How can technology improve the underwriting process?
Technology enables faster data extraction, fraud detection, and risk analysis. Tools like Inscribe help automate