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Underwriting is the process through which an individual or institution takes on financial risk for a fee. This risk most typically involves loans, insurance, or investments.
For instance, an insurance company uses underwriting to judge applicants for coverage and decide whether to accept or deny their application. Similarly, a mortgage lender relies on underwriting to evaluate a loan application and determine whether to approve or reject a home loan.
When a company wants to issue, say, new bonds to get funds to retire an older bond or to pay for an acquisition or new project, the company hires an investment bank. The investment bank then determines the value and riskiness of the business to price, underwrite, and then sell the new bonds.
For securities, the underwriters will look at the financial situation of the issuer, such as their income statements, cash flow, debts, and any other potential liabilities, before pricing a bond or stock issue. They will also examine the issuer's credit rating, the institutional equivalent of a personal credit score.
What Is Underwriting? Investigate your credit history. Underwriters look at your credit score and pull your credit report. ... Order an appraisal. ... Verify your income and employment. ... Look at your debt-to-income ratio (DTI). ... Verify your down payment and savings.