Underwriting standards refer to the set of criteria applied to evaluate a loan applicant's worthiness for borrowing money. Banks and other financing institutions set these criteria to determine debt load, interest rates and other terms for borrowers. Underwriting standards involve reviewing different factors of loan applicants to ensure that the applicants can meet their repayment obligations.

The two main factors that most lenders consider when establishing underwriting standards are credit history and income sources. Banks will examine credit history by evaluating the applicant's debt-to-income ratio, payment history, and overall creditworthiness. This review is essential to ensure a borrower is capable of making timely loan payments without defaulting. With income sources, lenders will review tax returns, bank statements, and other documents to verify the amount of income earned.

By having underwriting standards, lenders are able to protect themselves from taking on too much risk. FDIC provides guidance on loan underwriting standards, so lenders have a common set of criteria to determine a borrower’s creditworthiness.

When banks provide mortgages and other loans, they are taking a risk that borrowers may not be able to repay their loan amount. Underwriting standards allow lenders to determine the amount of debt they are willing to issue accordingly to the current market conditions. This helps to reduce losses associated with a borrower's inability to pay back the loan.

Overall, underwriting standards can help to safeguard lenders from risk while still allowing qualified borrowers to obtain financing. Establishing strong underwriting standards and following them is critical for lenders as they are trying to mitigate their financial losses.