In this blog, we will cover and discuss manual underwriting versus automated underwriting guidelines. The Automated Underwriting System is a sophisticated computer system and is often referred to as AUS. There are two different types of AUS. Fannie Mae’s automated underwriting system is called Desktop Underwriter and is commonly referred to as DU. Freddie Mac’s version of the automated underwriting system is referred to as Loan Prospector or often referred to as LP.
What Is The Automated Underwriting System?
The automated underwriting system is like a brain. It is a complex computerized sophisticated system that will render a decision on whether a mortgage applicant is approved for a mortgage loan. The automated underwriting system will analyze the borrowers information from the 1003, tri-merger credit report, and other data entered by the loan officer. Within seconds, the automated underwriting system can render an automated decision. To proceed with the mortgage process, the loan officer needs to get an automated underwriting system approval or the borrower needs to be eligible on manual underwriting. FHA and VA loans are the only two mortgage programs that allow manual underwriting.
Difference on How Manual Underwriting Versus Automated Underwriting Guidelines
The automated underwriting system can render findings in a matter of seconds. DU and LP are two separate AUS. In most cases, both Fannie Mae’s DU and Freddie Mac’s LP will render the same decisions. However, there are other times where one AUS may give an approval and the other may render a denial. For example, Freddie Mac LP may be more forgiving on late payments after bankruptcy and/or foreclosure on a particular borrower than Fannie Mae’s DU and vice versa on a different borrower.
Automated Underwriting System Findings
There are three different automated findings the AUS will render:
Approve/eligible per AUS:
- The borrower has been approved per AUS.
Refer/eligible per AUS:
- The borrower may be eligible but the AUS cannot determine an AUS approval but can be manually underwritten.
Refer with Caution per AUS:
- This finding means the borrower is denied and does not meet the guidelines of the mortgage program.
Trying To Get a Refer/Eligible to an AUS Approval
When a loan officer cannot get an approve/eligible per AUS, the loan officer can try to play around with the AUS system such as adding more down payment, adding more reserves, or other positive factors in order to get an approve/eligible per AUS.
Manual Underwriting Versus Automated Underwriting Guidelines: Information Analyzed To Render The Automated Findings
The Automated Underwriting System will take into account the mortgage applicants following information:
- Credit scores
- Credit history
- Public Records
Conditions From the Automated Underwriting System Findings
Based on the information, the Automated Underwriting System will report its findings and can require conditions like the following:
- Rental verification
- Whether or not gift funds can be used
- Other mortgage conditions
Fannie Mae’s version of Automated Underwriting System is known as DU and Freddie Mac’s version is known as LP. Findings from the Automated Underwriting System are rendered as approve/eligible, refer/eligible, or refer with caution.
Difference Between Manual Underwriting Versus Automated Underwriting Guidelines Is DTI Versus Compensating Factors
Manual Underwriting Versus Automated Underwriting is the Approve/Eligible is rendered on automated underwriting and refer/eligible is rendered on manual underwriting. Refer/eligible files are mortgage applications that are eligible for mortgage approval but is not approved due to certain factors that the automated underwriting system cannot render an automated approval. A mortgage underwriter needs to carefully review the borrowers file manually.
Key Factors Reviewed by Mortgage Underwriters
Information such as the following needs to be reviewed carefully and analyzed by the underwriter:
- Credit Scores
- Overall Credit Payment History
- Debt to income ratios
- Compensating Factors
- Other factors that the automated underwriting system cannot render an approve/eligible per AUS
Mortgage underwriters have a lot of underwriter discretion on manual underwrites. Mortgage underwriters can approve a manual underwrite with late payments in the past 24 months if she believes it was due to extenuating circumstances and the borrowers have strong compensating factors.
Potential Reason For Refer/Eligible AUS Findings
There are multiple reasons why borrowers do not get an approve/eligible and the AUS renders a refer/eligible. Refer with caution pretty much means a denial due to certain factors that do not meet Fannie Mae, Freddie Mac, or FHA mortgage lending guidelines such as the following:
- Borrower not having met the mandatory waiting period after a housing event )foreclosure, deed in lieu of foreclosure, short sale)
- Did not meet the mandatory waiting period after Chapter 7 bankruptcy
- Other factors that the Automated Underwriting System picked up
For files that do not meet automated underwriting system guidelines, the files can be manually underwritten.
Manual Underwriting Needs To Go Through Lender Who Does Manual Underwrites
Not all mortgage lenders can do manual underwriting mortgage applications. You can only do manual underwriting on FHA and VA loans. The mortgage guidelines on manual underwriting is the same on both FHA and VA loans when it comes to debt to income ratios and compensating factors. Gustan Cho Associates is a mortgage company licensed in multiple states with no lender overlays on government and conventional loans. The team at Gustan Cho Associates are experts in manual underwriting.
Manual Underwriting Mortgage Guidelines
For those that do, there are more restrictions that apply than automated approved mortgage files. Manual underwriting is done for files that cannot get automated underwriting system automated approvals. Manual underwriters look for strong compensating factors such as rental verification, reserves, larger down payment, and lower debt to income ratios.
Debt to Income Ratio on Manual Underwriting
Manual underwriting maximum debt to income caps can be as high as 40% front end and 50% back end DTI with two compensating factors. Maximum debt to income ratios is capped at 37% front end and 47% back end with one compensating factors. Maximum debt to income ratios is capped at 31% front end and 43% back end with two compensating factors. Mortgage underwriters can surpass the above debt to income ratios on manual underwrites if the underwriter discretion permits it. Underwriters have a lot of power on manual underwrites.
Borrowers With No Credit Scores Need To Be Downgraded To A Manual Underwrite
For mortgage loan borrowers with no credit scores, a manual underwriting mortgage approval process can get them a mortgage approval by using non-traditional credit such as the following:
- Rental verification
- Electric bills
- Water bills
- Cable bills
- Internet bills
- Cellular bills
- Insurance bills
- Other alternative sources
The way to prove that is by providing the mortgage underwriter 12 months worth of cancelled checks.
VA And FHA Loans During And After Chapter 13 Bankruptcy
Gustan Cho Associates empowered by NEXA Mortgage, LLC NMLS 1660690 is a mortgage company licensed in multiple states with no lender overlays on government and conventional loans. A large percentage of our borrowers are folks who are in a Chapter 13 Bankruptcy repayment plan and/or just got their Chapter 13 Bankruptcy discharged. Most mortgage lenders have overlays on VA loans during and after Chapter 13 Bankruptcy and FHA loans during and after Chapter 13 Bankruptcy.
Manual Underwriting Versus Automated Underwriting Mortgage Lenders
Gustan Cho Associates has no lender overlays on Chapter 13 Bankruptcy during and after Chapter 13 Bankruptcy discharge on both FHA and VA loan programs. Both FHA and VA Loans without two years of seasoning after Chapter 13 Bankruptcy discharged date need to be manually underwritten. This is because the Automated Underwriting System will not render an approve/eligible per AUS.
Qualifying For Mortgage With a Lender With No Overlays
Borrowers who need to qualify for a mortgage with a national mortgage company with no lender overlays on government and conventional loans can contact us at Gustan Cho Associates at 800-900-8569 or text us for faster response. Or email us at firstname.lastname@example.org. We are available 7 days a week, evenings, weekends, and holidays. A large percentage of our borrowers are files that need to be manually underwritten. All of our pre-approvals are TBD Subject Property Mortgage Underwriting so they are full credit approvals that are fully underwritten and signed off by our mortgage underwriters.