How Conventional Automated Underwriting Decisions Work
What is Automated Underwriting (AUS)?
Automated underwriting (also known as AUS) is used by mortgage lenders to determine whether or not to approve your mortgage application. These automated, computer-generated mortgage loan underwriting decisions are the most common way to get approved for a home mortgage.
Automatic Underwriting System
Information from a mortgage loan application (Fannie Mae form 1003) is uploaded to an automated underwriting system (AUS) which retrieves relevant data, such as a borrower’s credit history, and arrives at a logic-based loan decision.
Automated underwriting engines can provide a near-instantaneous loan approval or denial decisions based on the information submitted to the system.
Implementing automated underwriting systems save home mortgage lending professionals a considerable amount of time, as doing the same process manually (called manual underwriting) can take as long as 60 days to complete.
In addition to the time savings, automated underwriting is preferred because it is based on algorithms, eliminating human bias.
The most frequently-used AUS (automated underwriting system) programs in the U.S. mortgage industry include:
Fannie Mae – Desktop Underwriter (DU)
The Federal National Mortgage Association (FNMA) is also known as Fannie Mae. Fannie Mae’s mission is to create minimum lending standards, and liquidity in the mortgage lending community by buying mortgage-backed securities to free up capital for lenders to then turn around and lend again.
To create consistency in the quality of home mortgages, Fannie Mae has developed a set of underwriting guideline standards that guide lenders on how to best assess risk, so that the opportunity for default is reduced to a predictable level.
The industry standard in mortgage underwriting is managed through Fannie Mae’s automated underwriting system (AUS) called Desktop Underwriter (DU).
Freddie Mac – Loan Product Advisor (LPA)
The Federal Home Loan Mortgage Loan Corporation, more commonly known as Freddie Mac, offers an alternative to Fannie Mae’s automated underwriting system (AUS) called Loan Product Advisor since 2016 (previously it was known as Loan Prospector (LP).)
Loan Prospector follows many of Fannie Mae’s underwriting standards, with distinct differences that would allow experienced and educated lending professionals to place a loan application into the automated underwriting system that would provide the best chance of approval.
Similar to Fannie Mae’s DU, Freddie Mace’s LP is an algorithm-based automated underwriting system, with minor differences in the way that risk is analyzed and assessed.
Should I use Fannie Mae or Freddie Mac?
It’s much easier today, and common practice to run “dual AUS” when you submit your loan application. This is just a fancy way to say that it’s run through both Fannie Mae’s DU and Freddie Mac’s AUS to see if one offers better terms, like an appraisal waiver.
The most common differences between Fannie Mae and Freddie Mac’s automated underwriting systems tend to be in the areas of income and employment analysis and documentation, among other risk assessment nuances.
For instance, Freddie Mac allows non-occupying co-signers, similar to FHA-insured loans, while Fannie Mae does not allow you to use the income from a co-signer not living in the home to help qualify.
Another common difference between Fannie Mae and Freddie Mac is around employment and income verification. Fannie Mae’s minimum employment and income standards require a 2-year history, with variable income, such as overtime, bonuses, and commission averaged over 24 months. Freddie Mac will, in some cases, only require a 1-year look-back of employment and income.
This subtle difference comes in very handy if you are self-employed, and made significantly more income in the most recent tax year, compared to the prior tax year. Fannie Mae would require that this income be averaged over 2 years, while Freddie Mac may allow you to only use the most recent year for qualifying.
Fannie Mae has stepped up as the leader in providing loan options for boomerang buyers purchasing after a bankruptcy, short sale, foreclosure or deed in lieu of foreclosure.
Not a Loan Approval?
An automated underwriting decision is only the first step when applying for a home mortgage loan. Because DU is an algorithm-based computer program, it can be easily manipulated, or influenced by the information that you put into the system, and on your loan application.
Many lenders will require that you provide the documentation required to back up all of the information on a loan application. Some lenders are willing to provide you with a loan approval without documenting all of the information submitted to the underwriting system.
In either case, you must provide documentation to back up, validate, or otherwise verify all of the information that is required for a mortgage loan application, or you do not really have an approval.
An automated underwriting approval is only as accurate as the information input into the system, and will only be as reliable as the documentation provided to support the information on your loan application.
Underwriting Documentation Requirements
Qualifying documentation requirements are pretty standardized throughout the industry, and apply to Fannie Mae, Freddie Mac, FHA and other automated underwriting approvals.
- Name, birthdate, social security number
- 2-year residence history
- 2-year employment history
- 2 years income documentation (W2’s or Tax Returns)
- Pay stubs covering the last 30 days for all borrowers
- Asset statements covering the last 60 days
- Source of all funds needed to close (assets, assistance, gifts, credits)
Manual Underwriting and Extenuating Circumstances
What happens if you cannot get an automated underwriting approval? Assuming that the lender input all of the data accurately, the automated decision will be pretty clear as to what factors it determined to be too risky to produce an Approve/Eligible decision. This guidance can be used to determine the best course of action for receiving an approval.
Sometimes you will get an automated approval based on your lender being able to explain certain things about your application. This is very common when there is a financial hardship in the past including bankruptcy, foreclosure, short sale, or deed in lieu of foreclosure.
False approvals can happen when your loan officer inputs information that cannot be documented. On the other hand, False denials can also happen when your loan officer inputs inaccurate, or incomplete information into the automated underwriting system.
In some cases, there are extenuating circumstances that will allow exceptions to standard underwriting guidelines that will allow your loan officer to “document” your way out of what would otherwise be a loan denial.
Manual underwriting is very rare when using Fannie Mae or Freddie Mac underwriting guidelines, and is not offered by many lenders. However, FHA insured financing offers automated, and manual underwriting alternatives to conventional loan challenges that simply cannot pass Fannie or Freddie scrutiny.
Frequently Asked Questions
Can Underwriters Make Exceptions?
Great question! Mortgage underwriters have some freedom to make exceptions in approving a mortgage application. This usually happens when someone is just outside of the requirements for one criterion, but there are other criteria that show enough strength to override those weaknesses. For example, if your debt-to-income ratio is a few percentage points too high, but everything else looks good and your credit score is significantly higher than required, they may want to grant you an exception.
Exceptions oftentimes require manager approval and are specifically considered during compliance reviews.
Underwriting exceptions usually require an underwriter to not use the faster and simpler automatic underwriting systems and to do a manual underwriting of your loan, a process that requires significantly more work and that takes much longer. As a result, many lenders won’t do manual underwriting.
If you’ve been turned down for a mortgage, it may be because your loan was just outside of the requirements for approval using automated underwriting and that lender was not willing to spend the time and effort to manually underwrite your loan. That’s why we recommend you talk with us if you’ve been turned down for a loan.
What is Desktop Underwriting / What is DU in the Mortgage World?
Desktop Underwriting (DU) is the process a mortgage underwriter who uses Fannie Mae’s Desktop Underwriter (DU) program uses to automatically determine whether you are qualified for a mortgage loan. Fannie Mae’s Desktop Underwriter uses the standard mortgage application form (Form 1033) and accesses information from 75 different sources to determine whether the lender should approve a mortgage loan application.
What is AUS in Mortgage?
The term AUS in the mortgage world is the process of using an automated underwriting system (abbreviated as an AUS) to analyze a person’s financial standing to determine whether they should be approved to receive a mortgage. AUS systems have the advantage of cutting the time and effort required to make that determination significantly, with the disadvantage of being less flexible in allowing the underwriter to make exceptions and use their judgment in the process.
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