Underwriting is a critical part of the loan process. For many lenders, it's also a frustratingly long process requiring hours of research and back-and-forth communication with borrowers to verify financial data.
The complexity of underwriting used to be necessary. The only way to ensure borrowers could repay a loan was by requesting physical documents, pulling credit scores, and verifying paycheck stubs manually. Today, the underwriting process is changing thanks to the rise of fintech solutions that reduce manual tasks and expand data for underwriting algorithms—resulting in increased access to personal loans, credit cards, and mortgages.
Before discussing how the underwriting process is changing, it's important to understand how it currently works.
What is the loan underwriting process?
The loan underwriting process is the steps a lender uses to determine if the risk of offering a loan to a borrower is worthwhile. During this process, the lender looks at bank statements, paycheck stubs, and other financial data to ensure the borrower can repay a loan.
After collecting this data, lenders incorporate it into their unique underwriting algorithms in order to determine the consumer’s creditworthiness, including the available loan size and interest rate.
Unlike the pre-approval process, which can be completed quickly, the underwriting process may take several days or even weeks, especially if the lender uses a manual process to verify income and assets.
If the lender is satisfied with the results of the underwriting process, the loan is offered.
What assets are considered in the underwriting process?
Assets, or any items of value that can be used against the loan, are an important part of the underwriting process. Lenders look at nearly all types of assets, including cash, income, and physical assets such as a home or commercial properties. Other factors considered include the borrower's credit score, employment record; and in the case of a secured loan, the appraised value of the secured item (such as a car or home) the borrower wants to purchase.
Some lenders, particularly fintech lenders, look at alternative data to determine creditworthiness, including cash-flow data like payments to utility companies, on-time rent payments, and counts of insufficient funds.
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How cash-flow data is used in underwriting
Cash-flow data refers to detailed financial data about inflows to and outflows from an account, such as loan payments or alternative sources of income. It is an exciting addition to the underwriting process for several reasons.
In the past, many lenders looked at a very narrow slice of financial data, such as credit score and debt-to-income ratio. As a result, many borrowers could not obtain loans, including the self-employed or those with thin credit files, such as young borrowers or recent immigrants.
The cash flow data that customers make accessible through Plaid allows us to better manage credit risk. With a more complete financial picture, we're able to evaluate individuals more accurately than traditional credit scoring alone.
Cash-flow data from personal bank or payroll accounts, or small business software provides lenders with a more holistic view of a borrower's financial data. It also creates an opportunity to evaluate borrowers who haven’t yet built up their credit scores, providing lenders with a broader pool of customers.
How long does the loan underwriting process take?
The average underwriting process generally takes between two and seven days. However, the exact timeline varies by lender, type of loan, and the complexity of each borrower's financial situation. Keep in mind, underwriting specifically refers to the process of verifying assets, income, and other details to finalize a loan, not the preapproval process, which is often done in less than a day, or the closing process, which can take a week or more.
Underwriting may take longer if the lender requests individual PDFs of documents and bank statements, due to the time required to gather and sort documents by both the lender and the borrower. For example, the borrower may need to visit their bank in person or submit the wrong documentation, resulting in more time to find and resubmit the correct files.
On the other hand, lenders using digital asset verification can process loans in as little as one day. Using Plaid, mortgage lenders like SoFi and Better instantly connect to a borrower's bank account and access the data needed to make an informed lending decision.
→ Need a more holistic view of your loan applicants' finances? Plaid’s lending APIs connect directly with borrowers’ financial accounts to enable more informed decisions, faster.
Loan underwriting timeline
The loan underwriting process starts when a borrower begins to submit information for their loan and ends when the loan terms are accepted. The steps between can take days or weeks, depending on the lender, underwriting process, and type of loan.
The loan underwriting timeline varies depending on the lender and the type of loan, but here is an example of a general timeline:
Pre-Approval + Application → One day to one week: Borrower applies for a loan, provides some basic financial information, and receives a pre-approval, if eligible.
Appraisal → Around one week: (For mortgages only) When the borrower finds a property to purchase, the lender performs an appraisal to ensure the property's value equals the purchase price.
Income and Asset Verification→ 1-2 days (with digital asset verification) or one week or more (manually gathering documents): The lender requests financial documents from the borrower to ensure they can afford to repay the loan.
Underwriting Decision + Funding → Around 3 days: Once the lender decides the loan is ready for approval, the final contracts are created. These detail the interest rate, monthly payment, and closing costs.
The underwriting timeline can be impacted by the type of loan (VA loans, for example, often take longer to close), the complexity of the borrower's financial data, and the number of other loans the lender is processing. These factors often lead to a long, frustrating underwriting process.
→ Want to verify assets and account ownership faster? Plaid’s asset verification APIs instantly provide an up-to-date view of a borrower’s bank accounts and assets.
How fintech is improving the loan underwriting process
A long underwriting process isn't just frustrating to borrowers; it can also result in fewer loans as documents expire or borrowers pull out of the process. Thanks to fintech, underwriting is changing in big ways. Using technology, lenders reduce risk, close loans faster, and provide a better customer experience. Here's how.
1. Reducing back and forth during document collection
Manual document collection is a long and daunting process for both lenders and borrowers. Lenders need specific documents and borrowers may misunderstand jargon or requirements, such as date ranges. This creates a resource-heavy process that can cost borrowers time and customers.
Fintech has enabled lenders to instantly fetch these documents by directly connecting with bank accounts, reducing back-and-forth communication. This also helps reduce the amount of rejected documents, questions from borrowers, and time spent waiting for documents to arrive.
2. Gaining access to a more complete financial picture
Traditionally, lenders used verifiable income and credit scores to determine whether or not to extend a loan. Using this data in the underwriting process meant many potential borrowers could not access loans due to thin credit histories or, in the case of self-employment, lack of W-2 documents.
Today, fintech solutions enable lenders to access a broader range of financial data, including past spending habits, historic and current account balances, inbound and outbound cash flow, payments to landlords or power companies, and gig-economy income. In addition to helping lenders gain a more complete financial risk profile, using these alternative data points in the underwriting process can expand access to capital and homeownership to people without a robust credit history.
3. Lowering the risk of loan fraud
Loan fraud is a growing challenge. Fintech is leading the charge in reducing fraud risk for all types of loans by using software to connect directly with source data from borrowers' bank accounts. This allows lenders to verify income and assets directly, rather than relying on documents that may be altered.
Fintech is also improving KYC (know your customer) compliance by making it easier than ever to verify identity. For example, using Plaid's Identity Verification solution, lenders can quickly and securely verify borrowers' identity in seconds using verified data sources, selfie verification, and bank statements to ensure customers are who they say they are.
These changes reduce the risk of fraud by ensuring borrowers provide accurate information about their identity and ability to repay a loan.
4. Speeding up the underwriting process
Fintech helps lenders speed up the underwriting process in several ways. For example, verifying a borrower’s assets and income has historically been a highly manual process. Borrowers had to print out bank statements, sign them, then upload them to the lender portal. The same was true for pay stubs and income statements. Fintech has significantly sped that process up.
Using fintech solutions, borrowers can digitally verify assets and income by directly accessing banking and other financial information. During the loan application process, borrowers connect their bank account or payroll provider account and provide the required information directly to the lender portal in minutes. This gives underwriters the documents they need significantly faster and with fewer mistakes.
A faster underwriting process isn't just convenient, it also reduces overhead costs and increases the number of loans that close.
→ Want to verify borrowers’ income and employment faster? Plaid’s Income APIs provide robust data pulls for employment and income verification in seconds.
Smarter underwriting is better for borrowers and lenders
Fintech companies are changing the underwriting process in big ways with tools like digital asset verification, and by making it possible to use alternative data to complement or replace the reliance on credit scores alone. These changes help fintech lenders make better lending decisions and reduce their risk. Borrowers benefit, too, with a better customer experience and increased access to loans.
Fintech is creating a long-term impact by enabling a shorter and more inclusive underwriting process. Millions of borrowers who might have been excluded in the past can now access financing to purchase a home, grow their business, or cover unexpected expenses.