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How Automated Underwriting Works

How Conventional Automated Underwriting Decisions Work

What is Automated Underwriting?

Computer generated mortgage loan underwriting decisions are the most common way to get approved for a home mortgage.

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 near-instantaneous loan approval or denial decisions based on the information submitted to the system.

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Implementing automated underwriting systems save home mortgage lending  professionals a considerable amount of time, as 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.

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How Automated Underwriting Systems Work

How Automated Underwriting Systems Work

Posted by FindMyWayHome.com on Thursday, July 27, 2017

Fannie Mae – Desktop Underwriter (DU)

The Federal National Mortgage Association (FNMA) is known by most 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.

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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 an 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 as of summer 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.

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Similar to Fannie Mae’s DU, 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?

The most common differences between Fannie Mae and Freddie Mac 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 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.

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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.

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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.

About Your Expert

Scott Schang

As a 19 year veteran of the Mortgage and Real Estate industry, I am passionate about educating and empowering consumers. I have been writing about consumer protection issues, and making sense of complicated real estate and mortgage topics on this website since 2007

Leave a Question or Comment About this Topic

  • Dwayne says:

    Hi Scott,
    I am a first time home buyer looking to purchase property in CT. I have a decent 65k a year job that I have been with for 5 years and close to 7% down payment for the property. Thing is, when I have the Mortgage Broker enter my information into that DU system, it is not giving him an approval. He’s even told me he has tried other routes like adding more of a down payment I would put in as a hypothetically situation but still doesn’t get an approval from the system. He says that even though my debt to income works somehow the computer isn’t taking the file, and it’s maybe also because it doesn’t like my credit profile along with the low downpayment. I have a 672 score from the last time I checked. Is there any way to get me approved for a mortgage for this property? Is there an alternative to this algorithm like system to get me funding?

    • Hi Dwayne, I think I connected you to Mia Schultz? She can definitely help.

      My thoughts, based on what you’ve stated, is that it’s possible that the loan officer does not have a lot of experience with DU maybe? It’s very unusual that you would not get an approval with a 672 credit score and more than 5% down payment. If you are running DU and trying to get a conventional loan, the first thing I would look at is reserves. You probably need 2 months of PITI payments in a liquid reserves account (just means you have access to it).

      Also, I would run FHA though DU. You should most certainly be able to get an approval with FHA, unless something was just input wrong in DU.

      It’s hard to say really, because the algorithms are proprietary, and yes, they do change. I firmly believe that a second opinion from someone that is a professional loan officer (this is their career) is the solution. If you called a lender from a commercial on TV, you’re most certainly dealing with a telemarketer that doesn’t have a clue. This is the single most common reason that I see.

      Hope this helps?

  • Lyn Smith says:

    Hello Scott,
    I have a question, we had a short sale 5 years ago and currently applying to get a mortgage loan. (Conventional) We were told that because of the short sale they were unable to provide us with a pre approval letter and we had to go through the whole procedure with the underwritter to get a approval letter instead.
    However, we are now told that we are approved manually by the underwriter but not the automated underwriting system because of our history of short sales. Even though this was 5 years ago. Therefore they could not approve us. What should we do in this case? Thank you

    • Thank you for your question. This doesn’t make any sense to me at all. What State are you buying in? Let me introduce you to a loan officer friend of mine that has experience with these guidelines.

      The short sale would not be the reason for not getting an automated underwriting decision for a conventional loan. If that’s the reason they are giving you, it’s not true. There must be something else.

      It doesn’t sound like this lender has much experience at all.

      I can definitely help you get to the bottom of this 🙂

      I also responded to your email and look forward to helping!

  • Jes says:

    Hi Scott,
    We closed on our new purchase 9/30/13 and closed on the short sale of our previous house 5/10/14. We currently have a conv loan and are looking to refinance it to get a lower rate. Our LTV is less than 80%, our DTI is good and our credit is around 730. Is there a program that will allow us to refi even though we’re just shy of 4 years out from the short sale?


    • Hi Jes,

      Unless the mortgage was included in a bankruptcy, your refinance options would be limited to USDA or FHA financing less than 4 years from the short sale. Depending on what your current rate is, a FHA mortgage WITH mortgage insurance is going to be about the same interest rate as a current Conventional interest rate.

      This is really a math question at this point, and whether it makes sense to refinance now and see what rates will be on 5/10/18, or just ride out what you have now and see what rates are on 5/10/18. I’m assuming that you plan to stay in this home for more than 10 years?

      If you would like, shoot me an email to scott@findmwywayhome.com and I can help you run those numbers.

      Hope this helps?

      • Jes says:

        Thanks for getting back to me. The mortgage on our current property wasn’t included in bankruptcy. I currently work in the mortgage industry and recently had a lot where the customer had a short sale in 2014 and was buying a conventional property so I thought maybe the guidelines had changed. Our current mortgage is at 5.5 and we had LPMI so I’m not sure if it would be worth going into an FHA loan for the next 8 months.

        • Hi Jes,

          I apologize, I asked if the mortgage was included in a short sale, I meant bankruptcy! You can ignore the short sale waiting period if the mortgage was included in a bankruptcy, and the bankruptcy waiting period has been met.

          A “market” rate on a FHA loan right now is about 3.5% for a 30 year fixed. Add to that your mortgage insurance at .80%, and your effective rate would be around 4.3%.

          Being in the mortgage industry, you know that it’s more than just the interest rate. Once you pay title insurance and closing costs, it’s unlikely that you will benefit in the long run from, even if you can lower your interest rate over 1%. Much of this math also depends on your loan amount.

          Even if interest rates continue on the trend that they’ve been on and continue to increase, it’s likely that you’ll still be able to drop your rate by around 1% in 8 months.

          Great job doing your homework!

  • Jackie says:

    Is there a website with a program that will allow me to input my income/debt into an “automated underwriting” program, such as the one to figure out my approximate FICO score, to see if there is a good chance that I will get approval through FNMA or Freddie Mac?

    • Hi Jackie,

      There is no consumer access to automated underwriting approvals, but an experienced lender can tell you whether or not you could get approved with a pretty high rate of accuracy.

      I saw your other question as well about needing a lender with experience with IBR Payments. I will introduce you to someone that I know and trust that has experience with all of the above!

      Hope this helps?

  • CHAY says:

    Hi Scott. I had a foreclosure included in my bk discharged in 2011. My current lender and past lender said that I had to wait 10 years to get a loan without pmi. I told them about the new rule regarding the foreclosure included in the bk and they said it didn’t help me because the foreclosure is reported on my credit report. I have a good income good credit, $100k+ in equity and I hate dumping over $200 a month in pmi payments. Plus I plan sell and move in less than 5 years so I would love to get an ARM or maybe an interest only so I can maximize my cash flow for better investing. What suggestions do you have. I am in California.

    • Hi Chay,

      I have asked Josh Lewis to follow up with you by email.

      I’m not sure where the 10 year waiting period came from, that simply isn’t true.

      It sounds like there are a few details here that we would need to explore. If the foreclosure did not take place until after the discharge of the BK, then you are eligible now. Also, depending on your loan amount, that will also affect the waiting periods.

      I think there’s an options here. The advice that you were given is inaccurate, so I’m cautiously optimistic that there is a solution for you here.

      Hope this helps?

  • Jason says:


    If I had a foreclosure finalize in January 2014, do you know any lenders that work with 10% down and offer reasonable rates like 5.5% or below. I can only find 7%. Looking to buy in Orange County so 20% is too much on a 900K -1.1mil property. We have good credit scores 730+ and only a car payment as far as debt currently owed to lenders.

    • Hi Jason,

      With a foreclosure less than 3 years ago, and 10% down payment, it’s going to be tough to find a portfolio loan for less than 7%. If you can come up with even 15%, those numbers might be a little better.

      I am in Orange County and have a couple pretty aggressive investors. Let me do some more research and see if there’s anything we can do.

      Was this mortgage included in a bankruptcy by any chance?

  • Jennifer Morrison says:

    Hi Scott, My husband and I filed BK 7 discharged 2/2017 I wanted to know when we would be able to buy, Im kind of confused with the 2 year fannie and 1 year freddie, we have reestablished good credit with good scores and will continue.

    • Hi Jennifer,

      If you did not include a mortgage in your bankruptcy, the waiting period is going to depend on the type of financing that you’re applying for.

      Both Fannie and Freddie are going to require a 4 year wait from the discharge date. FHA and VA is only 2 years, and USDA is 3 years

      Hope this helps?

  • Hollyann says:

    Hello, Scott! My fiancé and I are first-time homebuyers and looking for advice on how we may get a first mortgage. We’re not looking for the faniest and most expensive of homes, but rather just an approval to begin our life together. Could you offer us some advice on the issue?

    • Hi Hollyann,

      I received your information that you submitted as well, and I’ve introduced you to a loan officer friend of mine that can help in OH. Probably the single beset thing you can do is to work with a loan officer that is passionate about helping people.

      If you don’t mind doing some reading, I’ve put together a first time homebuyer guide. It’s a series of 13 articles that covers most everything you will encounter during the home home buying process.

      Here’s a link to the homebuyer guide – https://www.findmywayhome.com/first-time-home-buyer/buying-your-first-home/

      You should see an introduction to my friend in your email by now. Mia is amazing. She has worked with many people from this website, I think you’ll really like her.

      Hope this helps?

  • Toni says:

    Hi Scott. My husband was discharged from Chapter 13 ( with a foreclosure) March 25, 2015. Can you let us know when we could apply for a conventional mortgage

    • Hi Toni,

      If the foreclosure took place after the filing of the bankruptcy, and was discharged in the Chapter 13, you would be eligible for Conventional financing now.

      These guidelines seem to really confuse most lenders. If you would like me to introduce you to a lender that has experience with the guidelines, send me an email directly to scott@findmywayhome.com with your contact information and State you’re buying in and I can connect you with someone.

      Hope this helps?

  • Kellie Sellner says:

    Hi, Scott. My husband I short saled our home in 2015. We settled on 9-1-15. We are currently renting but looking to see when we would be able to purchase another home. We are looking at homes that need some updating due to the high cost of new/newer homes in our area. We have heard different options on when we are able to buy. Some say two years with 20% and others say 3 years with 3.5%-5% if we go FHA. Any and all information is helpful. Also, my husband is a police officer and we have heard that some lenders will work exclusively with police, fire, first responders, etc.

    • Hi Kellie,

      You would be eligible for FHA financing in 3 years from the short sale. The only option for buying in less than that would be if you are eligible for VA financing. There used to be a Fannie Mae guideline that would allow you to buy in 2 years with a 20% down payment, but that guideline was changed in 2014.

      Conventional financing will allow you to buy in 4 years from a short sale. The exception to this is if the mortgage was included in a bankruptcy prior to the short sale.

      As far as Police Officer loans, there may be local programs in your City or County that offer some form of assistance to first responders. There is also a government HUD program that will allow you to buy certain homes in low to moderate census tracts for 50% of the sales price if you are a first responder.

      This program is called the Good Neighbor Next Door program. Here’s more information on that program – https://portal.hud.gov/hudportal/HUD?src=/program_offices/housing/sfh/reo/goodn/gnndabot

      Hope this helps?

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