# Mortgage underwriting > Mediated Wiki article. Canonical URL: https://mediated.wiki/source/Mortgage_underwriting > Markdown URL: https://mediated.wiki/source/Mortgage_underwriting.md > Source: https://en.wikipedia.org/wiki/Mortgage_underwriting > Source revision: 1352728732 > License: Creative Commons Attribution-ShareAlike 4.0 International (https://creativecommons.org/licenses/by-sa/4.0/) Process in risk management This article has multiple issues. Please help improve it or discuss these issues on the talk page. (Learn how and when to remove these messages) This article needs more citations. Please help improve this article by adding citations to reliable sources. Unsourced material may be challenged and removed. Find sources: "Mortgage underwriting" – news · newspapers · books · scholar · JSTOR (January 2021) (Learn how and when to remove this message) This article includes a list of general references, but it lacks sufficient corresponding inline citations. Please help to improve this article by introducing more precise citations. (January 2021) (Learn how and when to remove this message) (Learn how and when to remove this message) **Mortgage underwriting** is the process a [lender](/source/Lender) uses to determine if the [risk](/source/Risk) (especially the risk that the borrower will [default](/source/Default_(finance))[1] ) of offering a [mortgage loan](/source/Mortgage_loan) to a particular [borrower](/source/Borrower) is acceptable and is a part of the larger [mortgage origination](/source/Mortgage_origination) process. Most of the risks and terms that [underwriters](/source/Underwriter) consider fall under the five C’s of underwriting: [credit](/source/Credit_(finance)), capacity, cashflow, [collateral](/source/Collateral_(finance)), and character. (This is also known in the UK as the three canons of credit - capacity, collateral, and character.) To help the underwriter assess the quality of the loan, banks and lenders create [guidelines](/source/Guidelines) and even [computer models](/source/Computer_models) that analyze the various aspects of the [mortgage](/source/Mortgage_loan) and provide recommendations regarding the risks involved. However, it is always up to the underwriter to make the final decision on whether to approve or decline a loan. ## Risks for the lender Risks for the lender are of three forms: interest rate risk, default risk, and prepayment risk. There is a risk to the lender that the rate on an [adjustable-rate mortgage](/source/Adjustable-rate_mortgage) may decrease. If this is not matched by correlated decreases in rates on the lender's liabilities, profits will suffer. If a rate on a mortgage contract increases significantly, this is normally favorable to the lender in the absence of correlated increases in rates on liabilities. However, the lender faces the risk that the interest rate increase could be unaffordable to the borrower, forcing the borrower into default, in which case it could be necessary to foreclose on the property (with substantial costs of foreclosure). In addition, the lender faces the risk that the value of the property underlying the mortgage could drop in value to below the outstanding balance on the mortgage; if this event induces the borrower to default due to [moral hazard](/source/Moral_hazard), the lender must not only incur the costs of implementing a foreclosure but also must sell the property at a price that fails to recoup the lender's investment. One additional risk for lenders is [prepayment](/source/Prepayment_of_loan). If market interest rates drop, a borrower could refinance the [fixed-rate mortgage](/source/Fixed-rate_mortgage), leaving the lender with an amount that now can be invested only at a lower rate of return. This risk can be mitigated by various sorts of prepayment penalties that will make it unprofitable to refinance even if the rates of other lenders decrease. ## See also - [Credit risk](/source/Credit_risk) - [Mortgage underwriting in the United States](/source/Mortgage_underwriting_in_the_United_States) ## References 1. **[^](#cite_ref-1)** RG Quercia, MA Stegman (1992), ["Residential mortgage default: A review of the literature"](http://www.knowledgeplex.org/programs/jhr/pdf/jhr_0302_quercia.pdf) (PDF), *Journal of Housing Research*[*[permanent dead link](https://en.wikipedia.org/wiki/Wikipedia:Link_rot)*] v t e Real estate Property Tertiary sector By location Bangladesh Canada China Indonesia Italy Turkey Kenya Pakistan Panama Puerto Rico Russia Saudi Arabia United Arab Emirates United Kingdom Types Commercial property Commercial building Corporate Real Estate Estate Extraterrestrial real estate International real estate Lease administration Niche real estate Garden real estate Healthcare real estate Vacation property Arable land Golf property Luxury real estate Off-plan property Private equity real estate Real estate owned Residential property Sectors Property management Real estate development Real estate investing Real estate flipping Relocation Law and regulation Adverse possession Chain of title Closing Concurrent estate Conditional sale Conveyancing Deed Eminent domain Encumbrance Foreclosure Just cause eviction Land law Land registration Leasehold estate Lease Property abstract Real estate transaction Real estate contract Real property Rent regulation Severance Torrens title Zoning Economics, financing and valuation Asset-based lending Capitalization rate Cash out refinancing Effective gross income Gross rent multiplier Hard money loan Highest and best use Home equity Home equity investments Home equity loan Home equity line of credit Investment rating for real estate Mortgage insurance Mortgage loan Negative equity Real estate derivative Real estate economics Real estate bubble Real estate valuation Remortgage Rental value Reverse mortgage Parties Appraiser Buyer agent Buyer broker Chartered Surveyor Exclusive buyer agent Land banking Landlord Moving company Property manager Real estate broker Real estate investment club Real estate investment trust Real property administrator Tenant Other Companies Eviction Filtering Gentrification Graduate real estate education Green belt Indices Industry trade groups Investment firms Property cycle Real estate trends Undergraduate real estate programs Urban decay Urban planning List of housing markets by real estate prices Category Commons List of topics --- Adapted from the Wikipedia article [Mortgage underwriting](https://en.wikipedia.org/wiki/Mortgage_underwriting) by Wikipedia contributors ([contributor history](https://en.wikipedia.org/wiki/Mortgage_underwriting?action=history)). 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