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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.



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.

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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

  • Rodrigo says:

    Hi, Scott.
    My wife and I signed BK 7 on December 2012, we included a property that was not our primary residence, that property was foreclosure on June 2015. Now we would like to buy another property as investment or refinance our primary residence and get cash.
    Can we get a conventional loan right now? we know we can get a FHA loan but we want conventional better.
    we have 720 scores and more 105 k yearly. No debts.
    someone told me we can show that property was include in BK and the lender took long time to foreclosure and for that reason we apply for BK period not for Foreclosure period.
    Thanks

    • Scott Schang says:

      Hi Rodrigo,
      You could only use Conventional to buy an investment property, and you would be eligible to use conventional for either right now. Using Fannie Mae guidelines, there is a 4 year waiting period from the date of the BK discharge, you can ignore the foreclosure.

      Not many lenders know these guidelines. If you would like an introduction to a loan officer friend of mine that has experience with this type of scenario, shoot me an email to scott@findmywayhome.com and let me know what State you’re trying to buy in.

      Hope this helps?

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