Real estate underwriting is the process through which lenders review a loan application and determine the amount of risk involved. There are two major types of real estate underwriting: commercial real estate underwriting and residential real estate underwriting.
How Does It Work?
The underwriter takes a detailed look at the borrower’s financial standing. And the value of the property at hand to review the prospects of the deal. Underwriting is an important part of the transaction process as it can help both investors and lenders avoid unsuccessful properties.
Speaking in simple words, real estate underwriting can be considered like the pre-approval process for a loan. Both these processes analyze a borrower’s finances to verify the viability of a deal. The difference is that underwriting especially considers the level of risk involved. And in most cases, asks for extra information from the borrower.
Lenders, on the other hand, do not always ask for this comprehensive process. So, a lot of investors will learn how to underwrite a deal themselves (with the help of a financial advisor).
What Does an Underwriter in Real Estate Do?
An underwriter’s role is crucial in ensuring that a loan doesn’t become an NPA (Non-Performing Asset). During the process of real estate underwriting. They research both the borrower and the investment to ascertain the security of a loan. One of the main elements they will look at is the debt service coverage ratio (DSCR). This metric is calculated by evaluating the net operating income of an investment in relation to the total loan amount.
This will reveal if the profits generated from the investment will be enough to clear the loan. The underwriter will use this information. Along with a few other factors to decide whether or not a loan application should be accepted.
Furthermore, they are responsible for making sure that there is enough collateral to secure the potential loan. As most real estate loans will use the property as collateral, meaning the lender could seize the property if the borrower defaults on loan payment.
For the real estate underwriter, this involves confirming that the property value does not exceed the amount loaned to the borrower. The underwriter will use the appraisal amount to evaluate the loan size. The underwriter will likely not approve financing if, for some reason, the loan amount requested exceeds the appraisal value of the property.
Professional Advice for Streamlining the Underwriting Process
The underwriting process is stressful for home buyers as well as investors as it involves a lot of waiting and a while for the paperwork to be completed. Below are some important things to keep in mind to improve the overall experience and avoid any bumps along the way:
● Be clear in your application.
● Don’t lie about your income.
● Be available for questions.
● Wait before applying for other loans.
What Part Do We Play?
Gallagher & Mohan’s real estate outsourcing services aim to help our esteemed clients with preparing financial records, tracking transactions, aiding in property management accounting needs and more. Our team of experienced real estate tax accountants can help your team formalize your books and take many of the recurring procedures off your internal team’s shoulders. We have proven experience in helping companies with their internal property portfolios and also helping third-party management companies.
Gallagher & Mohan will modify itself to your SOPs (standard operating procedures) and apply our real estate bookkeeping services to help you grow faster and reach newer heights. Ultimately, our goal is to become an addition to your team, thus allowing you to grow efficiently.
Conclusion
As investors work to adjust themselves to the changing real estate industry, it can be easy to overlook the smaller features of any given deal. However, dedication and strong attention to detail are what differentiate savvy entrepreneurs from their peers. Before you proceed to your next property, no matter whether it be residential or commercial, familiarize yourself with the underwriting real estate process in detail. This way, you can avoid potentially risky investments and find successful additions to your real estate portfolio sooner.
