Automated Approval From Automated Underwriting System

This BLOG On Automated Approval From Automated Underwriting System Was UPDATED On July 15, 2017

An automated approval from the Automated Underwriting System is probably the most important factor in the mortgage approval process.

  • First time home buyers 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. 
  • It is a four page mortgage application where 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 application to get borrower pre-approved. 
  • Mortgage loan originator will then run a tri-merger credit report which are credit reports from all three credit reporting agencies:  Transunion, Experian, and Equifax. 
  • In the mortgage industry, the middle credit score is used for mortgage loan qualification.

Middle Credit Scores Used By Lenders

By the middle score, it means the following.

For example, say your Transunion credit score is 700, your Experian credit score is 650, and Equifax credit score is 600.

  • The middle credit score here is your Experian credit score of 650. 
  • The 650 credit score will be used to qualify mortgage loan borrower. 
  • After running credit report and reviewing credit scores, mortgage loan originator will go over mortgage application with borrower. 
  • Once loan officer confirms all the information on the 1003 mortgage application is correct, the mortgage loan originator will them submit mortgage application and credit report to Fannie Mae’s Automated Underwriting System. 

Automated Underwriting System

There are two types of Automated Underwriting Systems.

Fannie Mae Desktop Underwriter (DU) Freddie Mac’s Loan Prospector (LP):

  • Most mortgage lenders use Fannie Mae’s Automated Underwriting System which is also known as the Desktop Underwriter and 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 want to get is APPROVE/ELIGIBLE PER DU FINDINGS. 
  • The Approve/Eligible per DU FINDINGS is what is called an automated approval. 
  • An automated approval is the 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.

  • Mortgage 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 insured mortgage loan. 
  • If mortgage loan originator runs a credit check and credit score is below 580 FICO, mortgage loan originator will most likely help borrower boost credit score over 580 FICO. 
  • 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 FICO. 
  • Credit scores may have to be pulled multiple times until borrower meet the minimum credit score requirement. 
  • Once mortgage loan originator deems that borrower are qualified and get an approve/eligible per DU FINDINGS or LP FINDINGS, the credit report that was used in the Automated Underwriting System and its credit scores will be used throughout the mortgage approval process. 
  • If borrower’s credit scores drops or goes up, it will have no impact on mortgage approval process since the original credit scores will be used until mortgage loan is closed.
  • Credit Scores on credit report is good for 120 days.

Approve/Eligible Per DU Findings

Loan Officers with The Gustan Cho Team 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 FHA 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. 
  • 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 home that is just under wife’s name and 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 family member

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

  • With lenders with no lender overlays, an approve/eligible per DU FINDINGS is pretty much final approval as long as 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.

LENDER ABC MORTGAGE

  • Minimum credit score of 640 FICO. 
  • Most mortgage lenders have higher credit score requirements. 
  • The minimum credit score required to secure a FHA insured mortgage loan with a 3.5% down payment is 580 FICO. 
  • My client has a 597 FICO credit score and got an approve/eligible per DU FINDINGS but even with an approve/eligible, this client will not qualify with this particular mortgage lender.
  • Rental verification required:  12 months cancelled checks that has 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 has 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 a 4 credit tradelines overlays that requires these credit tradelines been 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 borrower’s credit scores were north of 620 FICO and had 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. 
  • On cases like these, the mortgage loan originator will play around with the Automated Underwriting System. 
  • Mortgage loan originator will do the following to see if he or she can get you an automated approval:
  • Try to add more reserves on your mortgage application.
  •  See if paying off or paying down credit cards will make DU or LP happier.
  •  Analyze credit report to see what DU FINDINGS is picking up that loan officers do not see.
  • Add a non-occupant co-borrower
  • If findings keep on getting a referred/eligible per DU FINDINGS, there are other options.
  • Other options if borrowers get REFERRED/ELIGIBLE: 
  • FREDDIE MAC, OR MANUAL UNDERWRITE

Mechanics Of Automated Underwriting System

The Automated Underwriting System is an extremely sophisticated computer system that analyzes every single aspect of a mortgage loan 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

Say a mortgage loan borrower gets an approve/eligible per DU FINDINGS.

  • Everything on the DU FINDINGS must be met in order for the mortgage loan borrower to be able to close on the mortgage loan. 
  • If DU FINDINGS asks for rental verification but the mortgage loan 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 mortgage borrower does not have rental verification?

Fannie Mae Versus Freddie Mac AUS

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

Manual Underwriting 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.
  • Manual underwriting requires that borrowers have compensating factors.

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. 
  • These debt to income ratio caps can be bumped up at underwriters discretion as long as the mortgage loan borrower has compensating factors. 
  • Some examples of compensating factors are reserves, low payment shock and rental verification, larger down payment, long term on the job, second job that is not used for qualified income, and 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. 
  • To qualify for FHA Back to Work Extenuating Circumstances due to an economic event mortgage program, the mortgage loan borrower needs 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 affect the borrower’s household income by at least 20%. 
  • The mortgage loan borrower needs to take a HUD approved counseling course and they cannot apply for the FHA BACK TO WORK EXTENUATING CIRCUMSTANCES DUE TO AN ECONOMIC mortgage loan until 30 days has elapsed from the date of the HUD approved housing certificate. 

2007 FHA Back To Work Update

The FHA Back To Work Extenuating Circumstances Mortgage Program is no longer offered. HUD has discontinued this program on September 30, 2017. However, The Gustan Cho Team now offers NON-QM Loans where 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 24 months bank statement deposits and NOT withdrawals.

By Gustan Cho

www.gustancho.com

The information contained on Gustan Cho Associates website is for informational purposes only and is not an advertisement for products offered by The Gustan Cho Team @ Gustan Cho Associates or its affiliates. The views and opinions expressed herein are those of the author and/or guest writers of Gustan Cho Associates Mortgage & Real Estate Information Resource Center website and do not reflect the policy of Gustan Cho Associates Lenders Network, its officers, subsidiaries, parent, or affiliates.

9 Comments

  1. Becky Del Valle says:

    Very nice & knowledgeable information there! I enjoyed the read!

    Becky Del Valle
    Senior Loan Officer
    Brentwood, TN 37027
    Beckydv@bellsouth.net

  2. K.Jones says:

    Great read!! Do you know anyone who can help me in Ohio?

    • Gustan Cho says:

      We are licensed in 46 states and are licensed in Ohio. We are a Fannie Mae direct lender and do not have any lender overlays and just go off AUS findings. 580 minimum credit scores and you do not have to pay off any collection accounts or charge off accounts to qualify for a FHA Loan. Feel free to contact me at 262-716-8151 or email me at GLCProperties@aol.com
      Looking forward to working with you.

      Gustan Cho
      http://www.gustancho.com

  3. K.Jones says:

    Great read and very helpful. I think this is what I need. Do you know anyone who can help me in Ohio?

  4. JOHN ATKINSON says:

    I got a approved eligable from fanemae but my loan originater says that fannemae wants to see 6 months of reserve after closing. Is this usual

    • Gustan Cho says:

      Never heard of such thing. Is it an investment property you are buying. On owner occupant properties, minimum reserve requirements is no more than 3 months. It may be their lender overlays. Ask the lender to run your file through Freddie Mac instead of Fannie Mae. Call me at 262-716-8151 or email me at gcho@gustancho.com. I may be able to help you.

      Gustan Cho NMLS 873293

  5. Kevin says:

    looking to get a mortgage, have a civil judgment from a divorce, shows up on two of the three credit reports, have 700 credit score, can I still get a mortgage

    • Gustan Cho says:

      You can get a mortgage with judgments, however, you need a written payment agreement with the judgment creditor and need to show at least three months of payment history and provide three months canceled checks.