Underwriting Models for Small Business Loans

Cash Flow Underwriting:

• Description: Focuses on a business’s ability to generate sufficient cash flow to cover loan payments.

• Metrics: Debt service coverage ratio (DSCR), net operating income (NOI), and cash flow forecasts.

• Use Case: Ideal for businesses with strong operational cash flows, such as service-based companies.

Collateral-Based Underwriting:

• Description: Evaluates the value of collateral (e.g., inventory, equipment, or real estate) pledged by the business.

• Metrics: Loan-to-value ratio (LTV) and collateral appraisal.

• Use Case: Used for secured loans where tangible assets can mitigate lender risk.

Credit Score-Based Underwriting:

• Description: Relies on the business owner’s credit score and credit history.

• Metrics: FICO score, personal credit report, and payment history.

• Use Case: Common for smaller loan amounts or startups without extensive financial histories.

Industry-Specific Models SMB Undewriting Models:

• Description: Incorporates industry benchmarks and trends into risk assessment.

• Metrics: Industry growth rates, sector risk levels, and competitive positioning.

• Use Case: Tailored for businesses in high-risk or niche industries.

Alternative SMB Underwriting Data Models:

• Description: Uses non-traditional data sources, such as utility payments, e-commerce sales, or social media activity.

• Metrics: Transactional data, digital footprint analysis, and customer reviews.

• Use Case: Designed for underbanked or unbanked businesses without traditional credit histories.

  
  

Underwriting Methods for Mortgage Lending

Automated Underwriting Systems (AUS):

• Description: Digital systems used to assess mortgage applications based on predefined criteria.

• Examples: Fannie Mae’s Desktop Underwriter (DU), Freddie Mac’s Loan Product Advisor (LPA).

• Metrics: Loan-to-value ratio (LTV), debt-to-income ratio (DTI), credit score, and employment history.

• Use Case: Standard for conventional, FHA, and VA loans.

Risk-Based Pricing Models:

• Description: Determines interest rates and loan terms based on borrower risk.

• Metrics: Credit score, LTV, DTI, and loan amount.

• Use Case: Used for fixed-rate and adjustable-rate mortgages (ARMs).

Manual Underwriting:

• Description: Involves human analysis for cases that fall outside automated system thresholds.

• Metrics: Comprehensive review of borrower income, assets, employment, and liabilities.

• Use Case: Common for borrowers with unique circumstances, such as self-employment or limited credit history.

Portfolio Underwriting:

• Description: Loans held and serviced by the originating lender rather than sold to secondary markets.

• Metrics: Customized criteria set by the lender, often more flexible than standardized models.

• Use Case: Ideal for non-conforming loans or high-net-worth borrowers.

  
  

Bank Underwriting Models for Debt Refinances

Net Present Value (NPV) Analysis:

• Description: Calculates the financial benefit of refinancing by comparing the present value of existing debt to the new loan terms.

• Metrics: Discounted cash flow, interest savings, and closing costs.

• Use Case: Common for evaluating mortgage or business loan refinances.

Credit Score-Based Models:

• Description: Reassesses borrower creditworthiness post-original loan.

• Metrics: Updated credit score, credit utilization, and payment history.

• Use Case: Essential for unsecured loans or loans tied to personal credit.

Debt-to-Income (DTI) Models:

• Description: Ensures the borrower’s income can support the refinanced debt.

• Metrics: Monthly income versus total monthly debt obligations.

• Use Case: Standard for consumer loan refinances, such as mortgages or personal loans.

Cash-Out Refinance Models:

• Description: Focuses on the equity available in the underlying asset (e.g., home or business property).

• Metrics: Loan-to-value ratio (LTV) and equity withdrawal percentage.

• Use Case: Popular for mortgage and business property refinances.

Restructuring Models:

• Description: Used for refinancing distressed loans to make repayment terms manageable.

• Metrics: Revised repayment schedule, interest rate reductions, and principal adjustments.

• Use Case: Common in commercial or real estate debt refinances for struggling borrowers.