Automated Approval From Automated Underwriting System

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Automated Approval From Automated Underwriting System

This BLOG On Automated Approval From Automated Underwriting System Was UPDATED And PUBLISHED On November 12th, 2019

Automated Approval
Gustan Cho Associates

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
    • Equifax
  • In the mortgage industry, the middle credit score is used for mortgage loan qualification

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

Middle Credit Scores Used By Lenders

Middle Credit Scores Used By Lenders

By the middle score, it means the following.

For example, say 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 mortgage application with a borrower
  • Once loan officer confirms all the information on the 1003 mortgage application is correct, the loan originator will them submit mortgage application and credit report to Fannie Mae’s Automated Underwriting System

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 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

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 is 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?

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 loan originator runs a credit check and credit score is below 580 FICO, the loan originator will most likely help borrower boost 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
  • Credit scores may have to be pulled multiple times until borrower meet the minimum credit score requirement
  • Once loan originator deems that borrower is qualified and get 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 borrower’s 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 credit report is good for 120 days

Approve/Eligible Per DU Findings

Approve/Eligible Per DU Findings

Loan Officers with The Gustan Cho Team at Loan Cabin Inc. 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

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.

  • 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

LENDER ABC MORTGAGE

  • 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 a 4 credit tradelines overlays that require 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

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
  • 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 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 are 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 Approval Via Automated Underwriting System

Mechanics Of 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 On Automated Approval

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 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 AUS

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 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
  • 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 mortgage loans
  • What does mortgage loan borrower do if Freddie Mac denies you?

Manual Underwriting Versus Automated Approval Is The Choice Of Last Resort

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

Automated Approval Versus Manual Underwriting And Debt To Income Ratios

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 debts 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 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

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, borrower needs 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%
  •  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 has elapsed from the date of the HUD-approved housing certificate

2019 FHA Back To Work Update

2018 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 24 months of bank statement deposits and NOT withdrawals.

By Gustan Cho

www.gustancho.com

15 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?

    1. 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?

    1. Gustan Cho says

      We can help you. We are licensed 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

    1. 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

    1. 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.

  6. A credit score is a measure of how trustworthy you are to financial institutions. Credit cards are only the most visible part of the equation, and any debt in your name (or sometimes even things like utilities bills and missed rent) plays into how likely you are to pay back money that is lent to you. I never understand all this until I contact this professional Dale Elenteny, Senior Mortgage Advisor for Gustan Cho Associates at Loan Cabin Inc. NMLS 1657322 whom I contact few months ago when I wanted to clear all inquiries on my credit and add tradelines. We both agree on a deal, he asked for some of my details and the outcome was epic all debt are marked as paid, late payments appear as on time payment, eviction were erased and finally he helped me add 3 tradelines on my credit Now I can just apply for whatever loan I want to apply for which has been working for me well. Dale Elenteny website is http://www.gustancho.com/delenteny

    1. Gustan Cho, NMLS 873293 says

      Thanks Mike for the information.

  7. Stacey Baxley says

    This very helpful and interesting to read. Are you licensed in Alabama? My dream is to own a home one day.

    1. Gustan Cho, NMLS 873293 says

      Good morning. Our Alabama license is pending. We should be licensed in Alabama is about 60 to 90 days. Thank you.

  8. Adia says

    Are you licensed in Virginia?

    1. Gustan Cho, NMLS 873293 says

      Our Virginia license is pending. However, I have an associate who is a direct lender with no overlays licensed in Virginia. Feel free to email me at gcho@loancabin.com or text me at 262-716-8151.

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