In this guide, we will cover how errors on credit reports affect AUS Findings. One of the most important things to realize before a mortgage loan application can be processed and underwritten is to get a DU ( Desktop Underwriter ) automated approval by Fannie Mae’s Automated Underwriting System.
Fannie Mae’s Automated Underwriting System is a sophisticated mortgage, credit, and financial analyzer. The AUS analyzes borrower’s income, assets, liabilities, information on credit reports, and credit scores into account. It then comes up with a decision on whether the mortgage loan request is approved or denied.
Fannie Mae and Freddie Mac’s automated underwriting system is a sophisticated AUS system but will only go by whatever is stated on the mortgage loan application and whatever reports on the credit reports. This article will discuss and cover errors reported on consumer credit reports.
How Does AUS System Work?
There are two types of Automated Underwriting Systems. Fannie Mae has Desktop Underwriter, and Freddie Mac is the Loan Prospector. DU is more common, so we will relate to Fannie Mae’s DU FINDINGS on this blog. The Automated Underwriting System analyzes credit reports in extreme detail by the following:
- Analyzing prior collections
- Credit account balances
- Borrowers payment history
- Prior bankruptcy
- Prior foreclosures
- Recorded dates of bankruptcy
- Recorded dates of foreclosures
- Recorded dates of short sales
- Tax liens, repossessions
- Outstanding credit disputes
- Other factors from your credit reports in its decision process
Automated Underwriting System Process By Lenders
The DU findings only take a few minutes from when the mortgage loan originator inputs your information. Errors will affect DU Findings. The Automated Underwriting System reads off whatever is on credit reports and will pick errors on credit reports.
Many lenders will have a two-step mortgage approval system: AUS Findings Approval is the first and most important and the second step is the lender overlays. Mortgage lender overlays is when lenders have additional guidelines that is above and beyond the minimum agency mortgage guidelines. Gustan Cho Associates has only one step mortgage approval process. We have no lender overlays. We just go off the automated underwriting system findings.
It is the loan officer’s job to check for errors on all three credit reports. Borrowers should notify the mortgage loan originator so he or she can correct the errors on credit reports before submitting it to Fannie Mae’s AUS for the DU Findings.
How Mortgage Approval Gets Denied Due To Errors On Credit Reports
As discussed earlier, the Automated Underwriting System will go off whatever is reported on credit reports. AUS cannot pick up errors on credit reports. For example, for a mortgage loan borrower to qualify for a conventional loan after a deed-in-lieu of foreclosure, there is a four-year waiting period after the recorded date of the deed-in-lieu of foreclosure as long as the mortgage loan borrower has a 5% down payment. However, the verbiage needs to read the deed-in-lieu of foreclosure on the credit report and not a foreclosure.
Fannie Mae and Freddie Mac differentiates a deed-in-lieu of foreclosure versus regular foreclosure. The waiting period between a deed-in-lieu of foreclosure and foreclosure is different on conventional loans.
The code must be an M5 ( deed-in-lieu of foreclosure ) and not an M9 (a regular foreclosure). Suppose a foreclosure is reported and not a deed-in-lieu of foreclosure. In that case, Fannie Mae will deny the automated findings because there is a 7-year waiting period—the 4-year waiting period after a deed-in-lieu of foreclosure and short sale to qualify for a conventional loan.
Errors on Credit Reports on Deed-In-Lieu Being Reported As Regular Foreclosures
In many cases, due to errors on credit reports, borrowers who have had a foreclosure deed-lieu of foreclosure have a regular foreclosure reported on their credit reports. The AUS will be a denial on the DU Findings. Until errors are corrected and the new credit report reflects the correction, AUS will not pick it up, and the mortgage applicant will not get an approve/eligible on the DU Findings.
The automated underwriting system will read whatever data is stated on the credit report and mortgage loan application and will solely go by the data. If the credit report is not posting a recent bankruptcy, the AUS will not pick that up and will render an approve/eligible per AUS versus a refer/ineligible per AUS.
In cases like this, the mortgage loan originator can submit the deed in foreclosure paperwork to a third-party credit consulting vendor along with the documentation and request a rapid rescore. This will update the corrected information to all three credit reporting agencies within 3 to 5 business days.
Errors on Credit Reports on Public Records
Other errors on credit reports include the credit reporting agencies reporting a bankruptcy, foreclosure, deed-in-lieu of foreclosure, or short sale on the wrong event date. For these errors on credit reports, the same correction procedures need to be met as the above. Always monitor credit reports for errors on credit reports and dispute the errors when discovered.
Credit disputes on non-medical collections are not allowed on non-medical collections on FHA loans. Other loan programs such as conventional loans and VA loans may or may not allow credit disputes during the mortgage process. It is up to the automated underwriting system findings.
One important note is that credit disputes with open balances are not allowed during the mortgage application loan process on non-medical collections on FHA loans. When hiring a credit repair company and intending on applying for a mortgage shortly, tell them to keep away from disputing credit derogatory tradelines with open balances unless there is proof that they are errors. For borrowers going through the mortgage application process currently and are retracting a credit dispute, credit scores will drop when a pending dispute is retracted.