Underwriting: When an individual or business entity seeks funding for a real estate project or purchase, the loan request is scrutinized by an underwriter to determine how much risk the lender is willing to accept. These underwriters are not to be confused with securities underwriters, who work to determine the offer price of financial instruments. Real estate underwriters take into consideration both the land and the borrower.
The United States Department of Housing and Urban Development defines underwriting as “the process of analyzing a loan application to determine the amount of risk involved in making the loan; it includes a review of the potential borrower’s credit history and a judgment of the property value.”
In most real estate loans, the property itself is used as collateral against the borrowed funds. Underwriters generally use a debt-service coverage ratio (DSCR) to determine if the property is able to redeem its own value. If so, the loan is a more secure proposition, and the loan request has a greater chance of being accepted.