What is preliminary underwriting?

Preliminary underwriting, often called "screening," is the initial evaluation of a loan application or investment opportunity to determine if it meets the firm's basic credit criteria. The goal is to decide whether to proceed with a full underwrite or to decline the deal quickly.

It is also referred to as "deal screening," "triage," or "initial credit review."

What preliminary underwriting includes

This phase focuses on high-level metrics to validate the deal's viability:

• DSCR calculation: Checking if the borrower’s historical and projected cash flow covers debt service obligations.
• Leverage sizing: Estimating the maximum loan amount based on EBITDA multiples or LTV (Loan-to-Value) caps.
• Collateral check: Ensuring the asset base (e.g., Accounts Receivable, Inventory, Real Estate) supports the requested loan amount.
• Screening memo: Drafting a one-to-two-page summary for the credit officer or Managing Director to secure approval to proceed.

How preliminary underwriting works

1. Ingestion: The analyst receives the teaser or initial borrower package (CIM, basic financials).
2. Rough spread: Key financials are extracted to build a back-of-the-napkin model or a standardized screening template.
3. Hurdle testing: The deal is tested against the bank's credit box (e.g., minimum DSCR of 1.25x or max leverage of 4.0x).
4. Decision: The team issues a “go” (move to full diligence/term sheet) or "no-go" (decline) decision.

Where preliminary underwriting is used

• Commercial banking: For processing high volumes of loan applications efficiently.
• Direct lending: For quickly filtering deal flow from sponsors to identify fits.
• Real estate lending: For sizing loans based on rent rolls and T-12 NOIs.

Benefits of AI in preliminary underwriting

• "Burn calories" efficiently: AI allows firms to screen high volumes of deals in minutes, rejecting bad fits without wasting hours of analyst time.
• Standardization: Ensures every deal is screened against the exact same credit policy rules and formatting.
• Responsiveness: Faster screening allows lenders to issue term sheets more quickly than competitors, a key advantage in competitive processes.

Limitations of preliminary underwriting

• Surface level: Preliminary underwriting relies on high-level data and typically does not detect deep fraud, complex legal risks, or nuanced quality-of-earnings issues.
• Data quality: It relies on the accuracy of the initial teaser data, which may differ from the final audited financials.

Preliminary underwriting FAQs

What is the difference between screening and underwriting? 

Screening (preliminary underwriting) is a fast "go/no-go" decision based on key metrics. Full underwriting is a deep dive into risks, legal diligence, and comprehensive modeling that leads to a final credit decision.

How long does preliminary underwriting take? 

Manually, it can take hours or days to organize files and spread financials. With AI, preliminary screening memos can be generated in minutes.

Why do banks automate preliminary underwriting? 

Banks see high volumes of applicants. Automating the preliminary stage enables them to filter out unqualified borrowers instantly, allowing analysts to focus only on viable deals.