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 you can complete online. Once you complete the four page 1003 mortgage application, the mortgage loan originator will get alerted via email and he or she will then start processing your application so he or she can get you pre-approved. Your 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 your 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 your mortgage loan. After running your credit report and reviewing your credit scores, your mortgage loan originator will most likely contact you to go over your mortgage application. Once he confirms all the information on your 1003 mortgage application is correct, your mortgage loan originator will them submit your mortgage application and credit report to Fannie Mae’s Automated Underwriting System. There are two types of Automated Underwriting Systems. 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 you 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 you get an automated approval, you 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. If you are seeking a home loan with bad credit and you need a 580 FICO credit score to qualify for a 3.5% down payment FHA insured mortgage loan. If your mortgage loan originator runs a credit check and your credit score is below 580 FICO, your mortgage loan originator will most likely help you boost your credit score over 580 FICO. You will not get an approve/eligible per DU FINDINGS or LP FINDINGS for a 3.5% down payment FHA loan if your credit scores are below 580 FICO. Your credit scores may have to be pulled multiple times until you meet the minimum credit score requirement. Once your mortgage loan originator deems that you are qualified and you 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 your credit scores drops or goes up, it will have no impact on your mortgage approval process since the original credit scores will be used until your mortgage loan is closed.
Approve/Eligible Per DU Findings
I specialize in helping folks get a home loan with bad credit in Illinois, Florida, Wisconsin, California, and Indiana. I am affiliated and have wholesale relationships with dozens of wholesale mortgage lenders and investors who do not have any mortgage lending 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. My wholesale mortgage lenders will not require any other overlays as long as I get a mortgage loan borrower 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. I have multiple wholesale mortgage lenders that will approve the above mortgage loan application and we can close on the file without a glitch. To me, an approve/eligible per DU FINDINGS is pretty much my final approval. 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
1. 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.
2. 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.
3. 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, your mortgage loan originator will play around with the Automated Underwriting System. Your mortgage loan originator will do the following to see if he or she can get you an automated approval:
1. Try to add more reserves on your mortgage application.
2. See if paying off or paying down your credit cards will make DU or LP happier.
3. Analyze your credit report to see what DU FINDINGS is picking up that you do not see.
4. Add a non-occupant co-borrower
5. If you keep on getting a referred/eligible per DU FINDINGS, you do have other option.
Other options if you 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 you get an automated approval per LP FINDINGS, you are set. However, you need to find a mortgage lender that does Freddie Mac mortgage loans. What do you do if Freddie Mac denies you?
Manual Underwriting Is The Choice Of Last Resort
In the event you cannot get an automated approval per DU FINDINGS and LP FINDINGS, your mortgage loan originator’s last resort is to take your file to a wholesale mortgage lender that can do manual underwriting on residential mortgage loans. Not all mortgage lenders do manual underwriting so your mortgage loan originator needs to first contact wholesale mortgage lenders that do manual underwrites and he or she needs to go over the file with a manual underwriting wholesale representative or a manual underwriting underwriter and go over the case scenario prior to submitting it to the manual underwrite mortgage lender. Manual underwrites go over the mortgage application individually and most manual underwriters look for compensating factors.
Manual Underwrititng 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, rental verification, larger down payment, long term on the job, 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. If you are a home buyer in Illinois, Florida, Wisconsin, California, or Indiana and want to see if you are a candidate for the FHA Back to Work Extenuating Circumstances due to an economic event mortgage loan program, please contact me at 262-716-8151 or at www.gustancho.com .
By Gustan Cho