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Underwriting in real estate: ever heard of it?
If you’re new to real estate investing, or even if you have a few deals under your belt, it still may be a new term.
But here’s the thing: it’s an important term to know, especially if you’re considering using a mortgage to fund your next real estate investment.
In real estate, underwriting is the process of evaluating a loan application to determine if the borrower is creditworthy.
Before taking out a mortgage to purchase a property, buyers — and this includes you as an investor— must go through the underwriting process to get approval.
If you’re a career real estate investor like me, knowing what underwriters look for can help you and your investments now and in the future.
Real Estate Underwriting Explained In Depth
When a potential buyer applies for a loan to purchase a property, the lender users the underwriting process to evaluate them.
What does that mean?
Underwriting assesses the risk level that the borrower presents to the lender.
It looks at your financial history to evaluate whether you as the borrower will be likely to make on-time loan payments.
In real estate, the underwriting process doesn’t just look at the borrower — it also looks at the property in question.
The underwriter will evaluate the property to ensure that the price of the property matches its appraised value.
This is particularly important for multi-family residential properties, which will be rented out and used to generate income to pay the monthly loan premiums.
This information is used to determine whether or not to approve the borrower’s loan application.
Additionally, underwriting is used to set appropriate interest rates and monthly premiums.
What Does A Real Estate Underwriter Do?
A real estate underwriter assesses several important factors to evaluate both the borrower and the property.
First, the underwriter will evaluate the borrower’s application and make sure the information provided is factual.
They will verify their financial status, evaluating their current income and debt levels as well as their credit history.
Then, the underwriter will evaluate the property, working with appraisers to determine the true value of the building.
For real estate investments, the underwriter will also look at the property’s potential for income and factor that into their overall risk assessment.
What Factors Does an Underwriter Look At?
Underwriters take a holistic look at your loan application when deciding whether or not to approve it, especially when you’re purchasing an investment property.
Here are some of the factors they will assess that you need to keep in mind.
Rent Growth
The underwriter will look at the rent history of the property, as well as rent trends and forecasts in the area.
This will help them estimate how rental prices for the property are likely to change in the future.
Properties that have significant potential for rent growth will be very attractive to underwriters.
Vacancy Rate
The underwriter will also look at the property’s historic vacancy rate, as well as the potential for vacancies in the future.
In this aspect, multi-unit properties are less risky, as they are almost never completely vacant.
Potential Cash Flow
When assessing the property, the underwriter will calculate how much cash that property is likely to generate.
This includes the amount of rent the property can produce, as well as any potential repair costs.
Many investors rely at least partially on income from their properties to pay their mortgages, which is why this is so important to consider.
Long-Term Returns
In addition to short-term cash flow, the underwriter will also consider the long-term returns a property will generate.
Is the property likely to increase in value significantly over time, or is there potential for depreciation?
These factors will help the underwriter assess the overall risk involved in the deal.
Financial Status
Finally, the underwriter will consider your current financial status and how that will affect your ability to make payments.
They will look at all current income sources, including any other real estate investments, as well as your existing assets and debts.
How to Give Yourself the Best Chance with An Underwriter
From my personal experience, an underwriter can make your break your ability to purchase a property.
To give yourself the best possible chance at securing the loan, you’ll need to be honest and transparent.
Don’t lie on any part of your application, as the underwriter will eventually uncover the truth about your finances anyway.
Instead, tell the underwriter everything they need to know up front, even if your finances are less than perfect.
This way, you can work with the lender to find a solution, rather than trying to hide information.
How to Find a Real Estate Underwriter
When applying for a loan for a new property, you won’t typically need to hire a real estate underwriter on your own.
Most banks, credit unions, and other lenders have trusted underwriters that they partner with to get the job done.
Focus on finding a lender that offers the best possible terms for your property instead.
How much does an underwriter cost?
When you apply for a mortgage, you’ll need to pay underwriting fees.
Underwriting fees can vary widely depending on the size of the deal, the type of property you’re looking to purchase, and the state you live in.
Most underwriting fees can range anywhere from $200 to $900.
The Bottom Line: Underwriter in Real Estate
Underwriting is a very important step in taking out a mortgage and purchasing a property, especially for real estate investors.
By understanding how underwriting works, you can give yourself the best chance to secure the right loan at the right interest rate for your investment property.
