In this article, we will cover and discuss refer-eligible per automated underwriting system findings. All mortgage loan applicants need to go through the automated underwriting system (AUS) before the loan process can proceed. If the findings on the automated underwriting system render an approve/eligible, that means the borrower is approved by the AUS. There are three decisions the automated underwriting system will render:
The Three Automated Findings from AUS
Approve/eligible per automated underwriting system:
- Approve/eligible per AUS means the file has an automated approval and is good to go
Refer-eligible per automated underwriting system:
- Refer-eligible means the automated underwriting system finds the mortgage loan applicant eligible but cannot render an automated underwriting system approval and needs to be manually underwritten
Refer with Caution:
- Refer with caution means the file has been denied and the borrower does not qualify for a mortgage
The only two mortgage programs that allow manual underwriting are FHA and VA loans. We will go more into how manual underwriting works in this blog in later paragraphs.
Understanding Refer-Eligible Per Automated Underwriting System
Refer-Eligible Per Automated Underwriting System means that the Automated Underwriting System cannot render an approve-eligible per automated findings. If the borrower gets findings of refer eligible per automated underwriting system they are eligible for a manual underwrite. Manual Underwriting is when further analysis is required by a mortgage underwriter.
Lender Overlays on Refer-Eligible Per Automated Underwriting System Findings
Most banks and/or mortgage companies will not approve borrowers who have a refer-eligible per automated underwriting system findings. Refer-eligible per automated underwriting system mortgage loan file can be done through manual underwriting. There are manual underwriting guidelines. Not all lenders will do manual underwriting. Underwriters look for compensating factors on manual underwrites. Compensating Factors are positive factors that borrowers have in their favor.
Importance Of Compensating Factors On Manual Underwriting
Examples of compensating factors are the following:
- low payment shock
- payment shock is how underwriters determine the factor of what they are paying for rent currently to what the new housing payment will be when they close on their home purchase
Other examples of compensating factors a borrower can have are larger down payments:
- A larger down payment on a home purchase shows that the home buyer has skin in the game
- A larger down payment means the lender has less risk because the borrower has skin in the game
- Most homeowners will do everything possible not to default on their mortgage if they have a lot of equity in their homes
- One month’s reserves are required on all manual underwriting
However, if the borrower has three or more months in reserves, lenders will consider that a strong compensating factor.
Refer-Eligible Per Automated Underwriting System: Reserves
Reserves are one-month P.I.T.I.
- P.I.T.I. stands for principal, interest, taxes, and insurance
- Mortgage lenders like to see at least three months of reserves from home buyers which is a great compensating factor
- Reserves do not have to be cash
Asset accounts are reserves such as the following:
- IRA accounts
- 401k Accounts
- Securities Accounts
- Other types of liquid investment accounts can go toward reserves
Refer-Eligible Per Automated Underwriting System Versus Approve Eligible Per AUS
As long as borrowers meet the minimum federal mortgage guidelines, borrowers should get an approve eligible per Automated Underwriting System. Let’s take a case scenario on an FHA loan. Borrower should get an approve eligible but gets a refer eligible per Automated Underwriting System so the file needs to be manual underwriting. Minimum FHA mortgage lending guidelines for a borrower is that they need a 580 credit score to qualify for a 3.5% down payment FHA home purchase mortgage loan. The maximum debt to income ratio required for borrowers with under 620 credit scores may be lowered to 43% debt to income ratio. If the AUS sees the borrower has layered risk due to lower credit scores.
Gift Fund Guidelines on Refer-Eligible Per Automated Underwriting System Findings
HUD allows for 100% gifted funds for the down payment on a home purchase. FHA does not require a minimum amount of active credit tradelines. However, aged credit trade lines are viewed as favorable and considered compensating factors. Verification of rent is required in most cases where the mortgage loan borrower has credit scores of under 600 credit scores or under AUS conditions. By all means, an FHA mortgage loan applicant who meets all of these requirements should get an approve-eligible per automated findings. Correct? Not always. There are many cases where mortgage loan applicants who meet all federal minimum mortgage lending guidelines will not get an approve-eligible. Borrowers can get a refer eligible per Automated Underwriting System because the automated system considers the borrower as having multiple layers of risk.
Is It Possible To Get A Refer-Eligible Per AUS Converted To An Approve Eligible?
The answer to this question is yes. It is done all the time. Experienced mortgage loan originators will see if they get a refer-eligible per automated findings to see if they can somehow reconfigure where they can get an approve-eligible per automated findings. The loan officer needs to first carefully review the automated findings. Need to see why they got a refer-eligible and not an approve-eligible.
Automated Underwriting System Decides Conditions on Gift Funds and Other Risk Factors
Many times, with mortgage loan applicants who just barely meet the federal minimum mortgage lending guidelines, the automated findings do not like gifted funds for the down payment on a home purchase. Just removing the gift funds and using the borrower’s own funds can convert the refer-eligible to an approve-eligible. Other factors where a refer-eligible can be converted to an approve/eligible is by adding assets to the borrower’s application. The automated system considers reserves as great compensating factors and in cases where the borrower barely meets the mandatory minimum guidelines. Having more assets can change the refer-eligible finding to approve/eligible findings.
What If Refer-Eligible Findings Cannot Be Changed To Approve-Eligible Findings
There are cases where there is no way of changing a refer-eligible per Automated Underwriting System to an approve-eligible per Automated Underwriting System. A perfect example is on a borrower who recently got a Chapter 13 Bankruptcy discharged. Under FHA guidelines, there is no mandatory waiting period for the borrower to qualify for an FHA loan after a Chapter 13 Bankruptcy discharged date. Unfortunately, the Automated Underwriting System will not get an approve-eligible per AUS on mortgage loan applications with a borrower who recently had a Chapter 13 Bankruptcy until 2 years has passed from the discharged date of the Chapter 13 Bankruptcy.
FHA and VA Loans Allow Refer-Eligible Per Automated Underwriting System Findings For Manual Underwriting
These folks will get a Refer-Eligible Per Automated Underwriting System and these files can be done by direct lenders like myself who handles manual underwriting. Not all lenders handle manual underwriting. Need to make sure that a mortgage lender can handle manual underwriting for those with a Chapter 13 Bankruptcy discharge. There are other cases where the automated system will not budge on the refer-eligible per automated underwriting system findings. The only way to get a home loan approved is through manual underwriting is to get a refer eligible per automated underwriting system and not refer/caution.
Get Qualified and Pre-Approved with Gustan Cho Associates
Homebuyers who need to qualify for a mortgage company licensed in 48 states with over 160 wholesale mortgage lenders. We have a national reputation for having dozens of wholesale lending relationships with lenders with no overlays. If you have any questions on getting pre-approved and qualifid for a mortgage, you can contact us at Gustan Cho Associates at 800-900-8569 or text us for a faster response. Or email us at email@example.com. We have no overlays on FHA, VA, USDA, and Conventional loans. We are also experts in non-QM and alternative lending programs. The team at Gustan Cho Associates is available 7 days a week, evenings, weekends, and holidays.
April 10, 2022 - 5 min read