Automated Approval By The Automated Underwriting System

In this blog, we will cover and discuss the automated approval by the automated underwriting system. It is key to get an approve/eligible per the automated underwriting system for the mortgage process to go forward. In the event the borrower cannot get an approve/eligible and gets a refer/eligible per AUS findings, the file can be manually underwritten by a human mortgage underwriter. However, most mortgage companies will not do a manual underwrite. FHA and VA loans are the only two loan programs that will allow manual underwriting on home loans. Mortgage underwriters have a lot of underwriter discretion on manual underwrites. In the following paragraphs, we will cover automated approval by the automated underwriting system.

What does Automated Approval Within an Automated Underwriting System Mean

Automated approval within an automated underwriting system refers to the process by which a loan or credit application is evaluated and approved automatically by the underwriting software without requiring manual intervention by a human underwriter. This automated process relies on algorithms and predefined criteria to assess the applicant’s creditworthiness and risk level.

How Does The Automated Approval Process Work

How the automated approval process typically works: Automated approval within an automated underwriting system offers several advantages, including speed, consistency, and efficiency. It enables lenders to process many applications quickly while maintaining accuracy and adherence to lending guidelines. Additionally, it reduces the need for manual underwriting, saving time and resources for both lenders and applicants.

Application Submission

The applicant submits their loan or credit application electronically through the lender’s platform or system.

Data Input and Verification

The system collects and verifies the applicant’s information, including personal details, financial history, credit score, income, assets, debts, and other relevant data.

Automated Underwriting Analysis

The system applies predefined rules, algorithms, and risk models to analyze the applicant’s information. It assesses factors such as credit score, debt-to-income ratio, employment history, and loan-to-value ratio to determine the applicant’s creditworthiness and risk level.

Decision Making

Based on the analysis, the system generates an automated decision on whether to approve, deny, or refer the application for further review. If the applicant meets the predefined criteria and poses an acceptable level of risk, the system approves the application automatically.

Communication of Decision

The applicant is promptly notified of the decision through the lender’s online platform, email, or other communication channels. If approved, the applicant may receive details about the terms and conditions of the loan or credit. However, ensuring that the automated underwriting system is properly calibrated, regularly updated, and compliant with relevant regulations is essential to minimize the risk of errors, biases, or adverse outcomes. Human oversight and intervention may still be necessary in certain cases, especially for complex applications or exceptions that fall outside the scope of the automated decision-making process.

What Does Manual Underwriting Mean in Mortgages

A manual underwrite is when a human underwriter will comb through the file line item per line item. The underwriter will make sure the borrower meets all the agency guidelines as well as the lender’s individual lender overlays. Manual underwriting is considered riskier files so a mortgage underwriter often will deny a file if he or she deems the borrower to be too risky for the lender. There are many instances where an experienced loan officer can be creative and turn a refer/eligible file into an automated underwriting system approval.  Click here to get approve for a mortgage loan

Automated Findings from AUS

Solutions to get a refer/eligible to an AUS approval may require removing a co-borrower, removing gift funds, adding more reserves, putting down a larger down payment, or other creative means. If a file gets a refer/eligible per automated underwriting system findings, the key is to do everything possible to get it to an approve/eligible per AUS findings before downgrading it to a manual underwrite.

The Importance Of The Findings From The Automated Underwriting System

An automated approval from the Automated Underwriting System is probably the most important factor in the mortgage approval process. First-time homebuyers and seasoned home buyers need to start the mortgage approval process by consulting with a mortgage lender. The mortgage lender will gather income and credit information. The first step in getting a home buyer pre-approved is for the home buyer to complete a mortgage application, also known as the 1003 mortgage application.

What Is The 1003 Mortgage Loan Application?

It is a four-page mortgage application that mortgage loan applicants can complete online. Once mortgage applicants complete the four-page 1003 mortgage application, the mortgage loan originator will get alerted via email and will start processing loan applications to get borrowers pre-approved. The mortgage loan originator will then run a tri-merger credit report which are credit reports from all three credit reporting agencies:

• Transunion
• Experian
• Equifax

In this article, we will cover and discuss automated approval from the automated underwriting system.

Middle Credit Scores Used By Lenders

All mortgage companies will pull a tri-merger credit report of borrowers. Lenders will use whatever the middle credit score of the borrower is. By the middle score, it means the following example below. For example, say the borrowers’ Transunion credit score is 700, Experian credit score is 650, and Equifax credit score is 600. The middle credit score here is the Experian credit score of 650. The 650 credit score will be used to qualify the borrower. After running the credit report and reviewing credit scores, the loan originator will go over the mortgage application with a borrower. Once the loan officer confirms all the information on the 1003 mortgage application is correct, the loan originator will then submit the mortgage application and credit report to Fannie Mae’s Automated Underwriting System.

The Two Different Automated Underwriting Systems Used By Lenders

There are two types of Automated Underwriting Systems. Fannie Mae Desktop Underwriter (DU) Freddie Mac’s Loan Prospector (LP). Most lenders use Fannie Mae’s Automated Underwriting System which is also known as the Desktop Underwriter and is often called DU for short. Freddie Mac’s Automated Underwriting System is called Loan Prospector and is often called LP for short

Findings Rendered By Automated Underwriting System

Once your mortgage loan originator submits your mortgage application and credit report to Fannie Mae’s Automated Underwriting System, the system will release DU FINDINGS within minutes of submission. DU FINDINGS will come back as follows:

• APPROVE/ELIGIBLE PER DU FINDINGS
• REFER/ ELIGIBLE PER DU FINDINGS
• REFER/INELIGIBLE PER DU FINDINGS

The results that everyone wants to get are APPROVE/ELIGIBLE PER DU FINDINGS. The approve/eligible per DU FINDINGS is what is called an automated approval. An automated approval is a golden ticket in the mortgage approval process and once borrowers get an automated approval, they are off to the races:

What If My Credit Score Changes During The Mortgage Approval Process?

The credit score the mortgage loan originator pulls originally will be the credit report and credit score it will be used throughout the mortgage approval process unless you do not qualify due to poor credit scores. Borrowers who are seeking a home loan with bad credit will need a 580 FICO credit score to qualify for a 3.5% down payment FHA Mortgages. If the loan originator runs a credit check and the credit score is below 580 FICO, the loan originator will most likely help the borrower boost the credit score over 580. The borrower will not get an approve/eligible per DU FINDINGS or LP FINDINGS for a 3.5% down payment FHA loan if credit scores are below 580.

Click here to apply for a mortgage loan with low credit score

Meeting The Minimum Mortgage Requirements to Get an Automated Underwriting System Approval

Credit scores may have to be pulled multiple times until the borrower meets the minimum credit score requirement. Once the loan originator deems that the borrower is qualified and gets an approve/eligible per DU FINDINGS or LP FINDINGS, the credit report that was used in the Automated Underwriting System. Its credit scores will be used throughout the mortgage approval process. If borrowers’ credit scores drop or go up, it will have no impact on the mortgage approval process. This holds true since the original credit scores will be used until the mortgage loan is closed. Credit Scores on the credit report are good for 120 days from the date it was pulled.

Approve/Eligible Per DU Findings

Loan Officers at Gustan Cho Associates are experts on government and conventional loans with no lender overlays. We just go off AUS Findings and have no lender overlays. Overlays are additional items that surpass the minimum requirements mandated by HUD mortgage lending guidelines and Fannie Mae mortgage lending guidelines. Those who get an approve/eligible per DU FINDINGS have an automated approval. That is all I need, an approve/eligible per DU FINDINGS and I am off to the races. We are Fannie Mae and/or Freddie Mac Direct so we will not require any other overlays with an approve/eligible. If I entered the mortgage loan application and credit report of a specific client and DU or LP gives me an approve/eligible via the Automated Underwriting System, we are all set.

Case Scenario In Getting An Automated Approval Findings Per AUS

Here is a recent approve/eligible per DU FINDINGS where we ended up closing the mortgage loan last week: CASE SCENARIO OF A HOME LOAN WITH BAD CREDIT THAT GOT APPROVE/ELIGIBLE PER DU FINDINGS AND THE MORTGAGE LOAN CLOSED:

• Client credit score: 597 FICO
• Client Debt to Income Ratios: 33% Front End and 43% Back End
• Income/Employment History: Job Gaps in the past two years but on current job for 9 months
• Rental Verification: Living in a home that is just under the wife’s name and the house is being foreclosed on.  No rental verification.
• Credit History:  Has prior bad history and open collections and prior judgment that has been satisfied.
• Has re-established credit with two secured credit cards recently.
• Credit cards cannot be used as credit tradelines since they are not seasoned for at least 12 months.
• DU FINDINGS did not mention anything about having credit tradelines requirements and still got approve/eligible per DU FINDINGS.
• Reserves:  The down payment will be gifted from a family member

In the above case scenario, I got approve/eligible per DU FINDINGS.

Mortgage Lenders With Lender Overlays Versus No Overlays

With lenders with no lender overlays, an approve/eligible per DU FINDINGS is pretty much final approval as long as the borrower can meet all conditions on AUS. However, most mortgage lenders will have their own mortgage lender overlays to the above file and the above mortgage loan client may not meet the mortgage lender’s lending underwriting guidelines. Here are samples where one particular mortgage lender cannot do the above deal due to their mortgage lender overlays. I will not mention their name.

Case Scenario of Lender Overlays

LENDER ABC MORTGAGE: We will take a look at another case scenario with what LENDER ABC MORTGAGE requires as part of their lender overlays: The minimum credit score of 640. Most mortgage lenders have higher credit score requirements. The minimum credit score required to secure an FHA insured mortgage loan with a 3.5% down payment is 580. My client has a 597 credit score and got an approve/eligible per DU FINDINGS but even with an approve/eligible, this client will not qualify with this particular lender. Rental verification required: 12 months canceled checks that have been paid to the landlord. Remember that this client is currently living rent-free on a home that is under his wife’s name and the property is being foreclosed on. 4 minimum credit tradelines that have been seasoned for 24 months: Remember that my client just recently got two secured credit cards to improve his credit scores. DU FINDINGS does not ask for credit tradelines but this particular has 4 credit tradelines overlays that require these credit tradelines to be seasoned for at least two year. There are many more mortgage lender overlays with this particular mortgage lender but the three examples I listed above will knock my client off the playing field.

Referred/Eligible per DU FINDINGS

There are cases where a mortgage loan borrower’s mortgage application cannot get an automated approval per DU FINDINGS. For example, I have seen cases where mortgage loan borrowers’ credit scores were north of 620 FICO and had a reasonable debt to income ratios and no past or derogatory credit items in the past year but cannot get an automated approval and get a referred/eligible per DU FINDINGS. In cases like these, the mortgage loan originator will play around with the Automated Underwriting System.

How To Get A Referred Eligible Findings to Approve/Eligible AUS Approval

The mortgage loan originator will do the following to see if he or she can get you an automated approval: Try to add more reserves to your mortgage application. See if paying off or paying down credit cards will make DU or LP happier. Analyze credit reports to see what DU FINDINGS are picking up that loan officers do not see. Add a non-occupant co-borrower. If findings keep on getting referred/eligible per DU FINDINGS, there are other options. Other options if borrowers get REFERRED/ELIGIBLE:  FREDDIE MAC, OR MANUAL UNDERWRITE.  Click here to get a referred eligible finding to approve AUS approval

Mechanics of Automated Approval By the Automated Underwriting System

The Automated Underwriting System is an extremely sophisticated computer system that analyzes every single aspect of the borrower’s mortgage application. From income to credit items on a borrower’s credit report to public records. There are cases where a mortgage loan originator feels strongly that without a doubt, they will get an automated approval per DU FINDINGS. But gets a referred/eligible and just boggles their minds on why they cannot get an approve/eligible per DU FINDINGS. Another important case scenario is the following.

Another Case Scenario of Automated Approval

Say a mortgage loan borrower gets an approve/eligible per DU FINDINGS. Everything on the DU FINDINGS must be met in order for the borrower to be able to close on the mortgage loan. If DU FINDINGS asks for rental verification but the borrower cannot provide rental verification, the approve/eligible is worthless. There are cases where DU FINDINGS will ask for rental verification, especially on cases where the mortgage applicant has super low credit scores. So what do we do if we cannot get an automated approval due to a referred/eligible DU FINDINGS or if we get an approve/eligible per DU FINDINGS. But DU FINDINGS requests rental verification but the borrower does not have rental verification?

Fannie Mae Versus Freddie Mac Automated Approval

The next step your mortgage loan originator will most likely do is see if he can take your file to Freddie Mac. He will input all of the information as he did with DU. But this time, he will submit your file to Freddie Mac’s Automated Underwriting System which is LP. Most of the time when a mortgage file looks clean but Fannie Mae’s DU FINDINGS come back with a referred/eligible.

Is Freddie Mac AUS Easier To Get an Automated Approval?

Taking it to Freddie Mac’s Automated Underwriting System, LP FINDINGS will render an approve/eligible. If the borrower gets an automated approval per LP FINDINGS, borrowers are all set. However, borrowers need to find a mortgage lender that does Freddie Mac’s mortgage loans. What does a mortgage loan borrower do if Freddie Mac denies you?

Manual Underwriting Versus Automated Approval Is The Choice Of Last Resort

In the event mortgage applicant cannot get an automated approval per DU FINDINGS and/or LP FINDINGS, the mortgage loan originator’s last resort is to see if it is eligible for file manual underwriting. Not all mortgage lenders do manual underwriting. Manual underwrites go over the mortgage application individually and most manual underwriters. Borrowers with high debt to income ratios that are going through manual underwriting require that borrowers have compensating factors. The maximum debt to income ratios on manual underwrites is 40% front end and 50% back end with two compensating factors.

Automated Approval Versus Manual Underwriting and Debt-to-Income Ratios

Manual underwriting mortgage loans have lower debt to income ratio caps. Most manual underwriting mortgage loans are capped at 31% front-end debt-to-income ratio and 43% back-end debt-to-income ratio with no compensating factors. With one compensating factor, the borrower can have a 37% front end and 47% back end DTI. With two compensating factors, the borrower can have a 40% front end and 50% back end DTI. These debts to income ratio caps can be bumped up at the underwriter’s discretion as long as the mortgage loan borrower has compensating factors.

What Are Compensating Factors For Manual Underwriting?

Some examples of compensating factors are the following:

• reserves
• low payment shock and rental verification
• larger down payment, long term on the job
• the second job that is not used for qualified income
• other positive factors that add strength to the mortgage file

FHA Back To Work Extenuating Circumstances Due To an Economic Event

HUD has launched a new program last August 15th, 2013 called the FHA BACK TO WORK EXTENUATING CIRCUMSTANCES DUE TO AN ECONOMIC EVENT. The Back to Work mortgage programs shortens the mandatory waiting period after a bankruptcy, foreclosure, deed in lieu of foreclosure, or short sale to a one-year waiting period to qualified mortgage loan borrowers. The Back to Work is no longer available and has been discontinued by HUD. However, we will post this older blog about the Back to Work for informational purposes.

Qualification for FHA Back To Work

You could not get an automated approval on Back to Work mortgages. It needed to be a manual underwrite. To qualify for FHA Back to Work Extenuating Circumstances due to an economic event mortgage program, the borrower needed the following:

• to have been out of work or underemployed for at least six months prior to the initiation of the bankruptcy, foreclosure, deed in lieu of foreclosure, or short sale which has affected the borrower’s household income by at least 20%
•  The borrower needs to take a HUD-approved counseling course

They cannot apply for the FHA BACK TO WORK EXTENUATING CIRCUMSTANCES DUE TO AN ECONOMIC mortgage loan until 30 days have elapsed from the date of the HUD-approved housing certificate.  Talk to us for how to qualify for FHA back to Work 

HUD FHA Back To Work Update

The FHA Back To Work Extenuating Circumstances Mortgage Program is no longer offered. HUD has discontinued this program on October 6th, 2018. However, Gustan Cho Associates now offers NON-QM Loans. There is no waiting period after bankruptcy, foreclosure, deed in lieu of foreclosure, and short sale. We also have Bank Statement Mortgage Loans For Self Employed Borrowers. Income is qualified by averaging 12 and/or 24 months of bank statement deposits and NOT withdrawals.