In this article, we will cover and discuss whether should I use Fannie Mae or Freddie Mac for AUS. There are two separate types of Automated Underwriting Systems.
Many loan officers do not realize that because borrowers cannot get automated approval with Fannie Mae’s Automated Underwriting System that they can get approve/eligible via Automated Underwriting System with Freddie Mac’s Loan Prospector. Loan originators use two different systems to get Automated Approval via the Automated Underwriting System. Fannie Mae Automated Underwriting System.
Automated Underwriting System Findings
It is referred to as DU, or Desktop Underwriter and the findings are:
- approved/eligible: This means the borrower meets all eligibility requirements and has an automated underwriting system
- referred/eligible: This means the automated system cannot issue an automated approval but the file may be eligible for manual underwrite
- referred with caution per DU FINDINGS: This means the file does not qualify
Freddie Mac Automated Underwriting System
It is referred to as LP, or Loan Prospector and the findings are:
- referred with caution per LP FINDINGS
In this article, we will discuss and cover the differences between DU and LP AUS.
What Is The Automated Underwriting System?
On both DU and LP FINDINGS, an approve/eligible per automated findings means that the file has an automated approval. Automated Findings of referred/eligible means that the file is eligible for DU/LP approve/eligible.
But the automated system is warning that the file cannot be issued an automated approval.
Should I Use Fannie Mae or Freddie Mac If I Cannot Get an Approve/Eligible Per AUS
This is because the AUS cannot render a solid automated approval due to one or more reasons listed below:
- The borrower may not have enough down payment
- The borrower may have a debt-to-income ratio that exceeds the maximum DU/LP Guidelines
- The loan amount limit listed may exceed the maximum Fannie/Freddie Conforming Loan Limits
- Items and derogatories on credit reports may need clarification
The borrower may not quite meet the mandatory waiting period after bankruptcy/deed in lieu of foreclosure/short sale.
Referred Eligible Per AUS Findings
Referred/Eligible per AUS Findings may be eligible for Manual Underwriting with FHA Loans. Whether applying for an FHA, VA, USDA, or Conventional loan, the loan application needs to be entered into the Automated Underwriting System for automated underwriting approval via Fannie Mae and/or Freddie Mac.
If you get a refer with caution, that means that you do not qualify for a mortgage and that something is wrong with your credit profile. Here is a list of some of the many reasons why a mortgage file will render a refer/with caution with Fannie Mae and/or Freddie Mac Automated Underwriting System:
- Too many derogatory tradelines and late payments in the past 12 months
- The borrower does not meet the mandatory waiting period after bankruptcy, deed in lieu of foreclosure, foreclosure, or short sale
- Multiple mortgage late payments in the past 12 months
Lower credit scores that the borrower does not meet the minimum credit score requirements.
Should I Use Fannie Mae Or Freddie Mac With FHA Loans?
Over 90% of all banks and mortgage lenders use Fannie Mae DU Automated Underwriting System as their AUS of choice in getting an automated underwriting system approval. Not all mortgage lenders are Freddie Mac-approved. The common word on the street is that is it easier to get approval with Fannie Mae than with Freddie Mac.
Most of the time when borrowers do not get an automated underwriting system automated approval with an FHA Loan, the chances are that the particular lender used Fannie Mae DU AUS to run the FHA file through. One important factor loan originators do not realize is that just because Fannie Mae’s automated underwriting system denies the file does not mean that Freddie Mac LP AUS will not grant approval.
Should I Use Fannie Mae or Freddie Mac For AUS Approval
One key important fact that loan officers need to realize is that Freddie Mac can do mortgage loans that Fannie Mae cannot do. And vice versa. There are data that Fannie Mae will not like that Freddie Mac has no issues with. For borrowers who need to qualify for Conventional Loans, they may qualify for Freddie Mac where they cannot qualify with Fannie Mae. There are mortgage loans that Freddie Mac can do that Fannie Mae cannot do.
Benefits of Conforming Loans
Here are the major bullet points on both Fannie Mae and/or Freddie Mac on Conventional Loans:
- Fannie Mae and Freddie Mac allow non-occupant co-borrowers
- Fannie Mae and Freddie Mac do not restrict non-occupant co-borrowers like HUD does with FHA Loans
- FHA Loans require non-occupant co-borrowers needs to be related to the borrower by law, marriage, or blood
- Fannie Mae and Freddie Mac will allow for W-2 Income Only Conventional Loan Programs
- All Conventional Loans are eligible for W-2 Income Only Mortgages
- Fannie Mae will require two years of tax returns on all self-employed borrowers
Freddie Mac will accept one-year tax returns from self-employed borrowers if LP renders an approve/eligible per LP FINDINGS.
Mortgage Guidelines On Conforming Loans
Fannie Mae and Freddie both have capped Debt to Income Ratios up to 50% DTI to get approve/eligible per DU/LP FINDINGS. There are no front-end debt-to-income ratio requirements per both FANNIE/FREDDIE Guidelines. However, each individual lender can impose a front-end DTI cap as part of their overlays.
With FHA loans, there are many times when Freddie Mac will issue an LP AUS automated approval where Fannie Mae DU AUS will NOT. Fannie Mae is known not to view gift funds as favorable for borrowers with lower credit scores. Especially with borrowers with credit scores of under 640 FICO.
Gift Funds For The Down Payment And Closing Costs
Fannie Mae is notorious for not rendering approve/eligible DU FINDINGS on borrowers who have gift funds as part of their down payment but have higher debt-to-income ratios. Bottom line is that FHA will allow debt-to-income ratios up to 56.9% DTI on borrowers who have credit scores of 620 FICO or higher. However, if you list that you are getting gift funds as part of the down payment for any borrower with a 56.9% DTI, the chances of getting approve/eligible per DU FINDINGS are very slim to none.
The trick is to make sure that you do not list that you are getting gift funds for the down payment if you have higher debt-to-income ratios. Same with limited credit tradelines. Fannie Mae does not like gifted funds for the down payment on borrowers who do not have strongly seasoned credit tradelines. Again, if you do not think your file will fly with Fannie Mae Automated Underwriting System, submit it to Freddie Mac and chances are that you will get an automated underwriting approval.
Warning: DO NOT RUN FANNIE MAE IF YOU PLAN ON GOING WITH FREDDIE MAC AUS
Should I use Fannie or Freddie? Loan officers need to be careful prior to run Automated Underwriting System. Many lenders WILL NOT ALLOW a Fannie Mae referred/eligible and/or Fannie Mae referred/caution to rerun into LP Freddie Mac Automated Underwriting System. However, they will allow you to run LP Freddie Mac AUS first and then run it through DU Fannie Mae AUS
Should I use Fannie or Freddie For Borrowers Denied AUS?
Loan officers should carefully think about whether asking themselves the question should I use Fannie Mae or Freddie Mac? Follow your mortgage company’s policy prior to running a borrower through the automated underwriting system, especially with files that are considered higher risks. There are instances where you may get approve/eligible per the automated underwriting system with Freddie Mac but not Fannie Mae. This holds especially true for borrowers with bad credit.
Should I Use Fannie or Freddie With Bad Credit
Here are higher-risk mortgage files that you should question should I use Fannie or Freddie AUS? If you get a borrower that got turned down via DU FANNIE MAE FINDINGS, then review the file and see if you can run it Freddie Mac, LP AUS. Freddie Mac LP Automated Underwriting System is much more aggressive with borrowers with lower credit scores. Freddie Mac LP Automated Underwriting System is much more aggressive with borrowers with higher debt-to-income ratios.
Freddie Mac LP Automated Underwriting System is much more aggressive with borrowers with late payments after bankruptcy and foreclosure. Freddie Mac LP Automated Underwriting System is much more aggressive with borrowers with late payments in the past 12 months. Freddie Mac LP Automated Underwriting System is much more aggressive with borrowers with 3 or fewer credit tradelines that have not been seasoned for a long time.
FHA Loans AUS Approval on Fannie Mae versus Freddie Mac
Should I use Fannie Mae or Freddie Mac? Loan officers often wonder whether should I use Fannie Mae or Freddie Mac. Fannie Mae and Freddie Mac are both used with the automated approval process of government and conventional loans. However, Fannie Mae and Freddie Mac each have their own way of analyzing and reading a borrower’s mortgage application data and credit report. So each of them may have its own way of rendering an automated approval. There are many times when one says nowhere the other will say yes to an approve/eligible per automated findings.
If you are classified as a higher-risk borrower and got turned down by a lender because you cannot get approve/eligible per DU/LP FINDINGS and need a second opinion, please contact us at Gustan Cho Associates at 800-900-8569 or text for faster response. We are available 7 days a week, evenings, weekends, and holidays. Borrowers can also email us at email@example.com.
This BLOG on whether should I use Fannie Mae or Freddie Mac was updated on November 22nd, 2022.
November 22, 2022 - 7 min read