💰 Today we will take a glimpse into the most interesting and complicated part of the lending business - underwriting. I believe it would be awesome if many of you had a chance to look into the underwriting process and understand it better. It will allow you to prepare and make better decisions, submit better applications and get higher offers.
The process actually varies from lender to lender and from the product to product. I will try to explain how the process works for small business loans because we specialize in them. But the general understanding and the general principles are the same for all type of loans. So let's say you have submitted an application. As you probably know by now we pre-qualify your application and submit it automatically to lenders.
I will quickly explain what we do for pre-qualification because it is also a part of the process. Lenders send us specific guidelines for every single product that they offer. Usually, those guidelines have things like minimum deposit requirement or minimum time in business. Each lender also specifies prohibited states where it cannot do business and prohibited industries that it does not fund. But let's say you passed the pre-qualification requirements and your file is to table of the underwriter.
📋 So usually the system works the following way:
Underwriter double checks if your file fits their standards. He goes back to the same minimum deposit requirements and minimum time in business. He carefully checks more details such as the number of deposits, the quality of deposits and so on. They also look into other things such as current balance and existing loans. If you do not pass the minimum standards, your file is sent back to Richie.
If your file passes those standards they will get to review your credit score and history. Depending on the lender underwriter does either a soft or hard pull on your credit and reviews information about your default. Lenders have access to a specific database where all defaulters are being recorded. If your file is OK, you do not have any default or tax liens, the lender will submit your file to final underwriting.
Basically, after the first and the second steps, your lender is on the path to send you the offer. It means your credit score fits their minimum, your default history satisfies them, and you fit their standards.
At this point, the job of the underwriter becomes to calculate the amount of a loan that they can offer. They can see the amount through your deposits, expenses and current balances. Basically, this allows a lender to figure out your free cash flow, the amount of money you are able to afford.
Each underwriter and lender has specific requirements for free cash flow. Basically, they can see how big of a loan they can offer and you can afford. Let's say you have $10,000 in free cash flow a month. It means that you can afford $10,000 in monthly payments.
☝🏾 Note: it is very important to know this fact. The amount of the loan is based on your deposits, business revenue, expenses, and current payments; the interest rate, and the length of the loan are based on your credit score.
Underwriters have a chart for terms of the loan and interest rate. They basically match you and your credit score with a corresponding interest rate and a term. They may also have maximum allowed loan amounts for each credit score type.
So once your lender matched and did all the homework, basically has a loan offer for you. Let's say your credit score was 600, and it corresponds with a 10 months loan was a buy rate of 1.29. It basically means that you are allowed to have a $100,000 loan at a 1.29-factor rate.
So your offer is ready the underwriter sends it to your broker and hopefully gets the loan signed and funded soon. We tried to show you how underwriters look at your file so you can have a better understanding of what happens in the background. Richie Lending is a company that allows making this process as seamless and smooth as possible, please rate your comments and questions.