What exactly does underwritting mean?
Are financial models, proformas, and valuations a type of underwriting? or are valuations and a proformas a type of financial models?
What does underwriting mean?
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Underwriting basically analyzes and opines on the risk of making a real estate loan or investment based on an evaluation of the creditworthiness of the borrower and an analysis of the property financials and value. The initial step is sizing the loan – i.e. determining how much to lend on the property based on the lender’s credit parameters such as max LTV, min DSCR and min debt yield. The next step would be an analysis of the borrower/sponsor, their experience, financial condition, creditworthiness, etc. Concurrent with that would be an analysis of the underlying collateral, i.e. the property. An underwriter will go through the appraisal, environmental site assessment, property condition report, budgets, historical financials, etc. as well as an analysis of the market, submarket, competitors, new supply, etc. All of the above would be synthesized into a credit memo which explains the deal, the borrower/sponsor, financials, deal strengths, weaknesses and mitigating factors overcoming the weaknesses to submit to the lenders credit committee for review and approval/denial of the loan application (or investment). Make sense?
I thought it was a synonym for financial modeling (i.e. proformas)?
Not really. It encompasses modeling, sure, but think of it as the analysis portion. In other words, why are you building the model? What assumptions are you including and how important are they? The model is a small piece, Underwriting as a process is essentially sourcing the information to create the model and the analysis that happens after you have numbers. Numbers in a vacuum don't mean anything, it's the analysis that's where you make your money. Good analysis, good returns. Bad analysis, bankruptcy.
The term "underwriting" refers to the process that leads to a final loan approval or denial, which is determined by a professional underwriter. An underwriter is an entity, typically a company, that is accountable for analyzing and assuming the risk of another entity.
Many factors are at play in a lender's final decision on a mortgage loan. These factors are all analyzed during the underwriting process.
Explanation of the lending underwriting process (Originally Posted: 01/25/2017)
can someone give me a general overview of the lending underwriting process/timeline from loan request to finalization? especially for Freddie/fannie multifamily
anyone?
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