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Automated underwriting system

ouija-boardWho approves your mortgage application? Is it the bank president, a loan committee, an underwriter or does the lender use a ouija (WeeGee) board? Would you believe a computer program determines approval?

The lender's lingo for the underwriting system is called "automated underwriting". The quasi-government agencies, Fannie Mae and Freddie Mac introduced automated underwriting in the 90's when the two companies became comfortable with the accuracy of the credit scoring model.

Prior to automated underwriting, processing a mortgage application was labor intense. First, there's the loan officer who reviews the applicant's credit report, monthly income, savings and employment information. From there the loan officer determines the suitable mortgage program for the home buyer and completes the necessary paperwork with the borrower. The application is then passed on to the mortgage processor who works with the applicant to gather any missing papers, orders the appraisal and performs other clerical details. After all the "i's" are dotted and the "t's" are crossed, the file moves to an underwriter. The underwriter is the approval person for the lender. The underwriter will make sure that all of the borrower's information is thoroughly documented and then decides whether the bank or mortgage company should extend a loan to the applicant. All that takes time, and for a bank, time is money. So along came automated underwriting to cut the time way down.

Here's how the automated system works.

The loan officer requests a credit report from Equifax, Transunion, and Experian credit agencies. The information in each credit agency is merged together to create a single credit report, called a tri-merged credit report. Along with the credit report, the loan officer will enter the applicant's information into his software program, which includes income, savings, including pensions, 401K's, CD's, employment information, and residency for the previous two years. After all the pertinent information is entered into the computer, the loan officer pushes a button and within seconds the automated underwriting system returns a decision on the application. The "response" as it's called, informs the loan officer and underwriter (approval person) whether the system will accept the application as approved, approved with conditions or return a referred response, which in lender language means, the approval program does not like the application, however, the underwriter could still approve the application, but, if the loan goes bad, the underwriter could be on the hot seat if the mortgage goes bad.

The benefits of automated underwriting include:

A binding commitment by Fannie Mae and Freddie Mac, provided that the applicant's information is entered into the program is accurate and documented.

The required documentation and verifications are substantially reduced with automated underwriting. Prior to automated underwriting the lender required 2 months of paystubs and the previous 2 year's W-2s. But with the automated underwriting system, the applicant may only have to provide the most recent paystub.

The amount of time to obtain loan approval, or pre-approval is significantly reduced. The automated underwriting determination is generated within minutes of entering the data.

The automated underwriting systems can be used by lenders for a genuine preapproval. Home buyers can feel comfortable shopping for a home, knowing that they will be offered a mortgage, provided their information has not changed substantially when they find a home and the estimated purchase has not varied much from the pre-approval.

Automated underwriting is a powerful negotiating tool with property sellers because the probability for final approval is likely. Home buyers should always request an updated loan pre-approval after locating a house.

Automated underwriting eliminates human bias.

Freddie Mac's automated underwriting program is known as Loan Prospector, and the name of Fannie Mae's program is called Desktop Underwriter.

Automated underwriting is available for FHA, VA, USDA and conventional home loans, including jumbo mortgages.