Nationwide Mortgage Licensing System (NMLS) Practice Exam

What does the term "underwriting" refer to in the mortgage process?

1. The evaluation of the risk of lending

2. The act of securing the property

3. The calculation of the buyer's credit score

4. The final approval of the loan

The correct answer is: The evaluation of the risk of lending

In the mortgage process, "underwriting" refers specifically to the evaluation of the risk associated with lending money to a borrower. This process involves assessing several factors, including the borrower's credit history, income, employment stability, and the overall financial situation to determine whether they are a suitable candidate for a loan and what terms would be appropriate. Underwriters analyze these factors to ensure that the lender is making a well-informed decision that balances the risk of default against the opportunity for profit. They also review the property being financed to confirm its value and ensure it meets the lender’s requirements. This comprehensive risk assessment is crucial for making lending decisions and helps protect the lender's investment. The other options refer to different parts of the mortgage process. Securing the property involves obtaining a lien on the property being financed, calculating the credit score is part of the borrower's preliminary evaluations but not the underwriting process itself, and the final approval of the loan typically occurs after underwriting has assessed the risk and deemed the borrower acceptable.