Automated Underwriting

How long did it take to get your last mortgage loan approved?   30 days?   45 days?   That has been typical performance in the mortgage business for years. Things have changed. How would you like to have your next loan application approved minutes after applying with the Loan Officer? Automated Underwriting, AU for short, has made this possible.

First, it is important to understand that virtually all loans under $300,700 will be sold to FannieMae or FreddieMac. These two companies buy loans from banks and other lenders, bundle them into pools, and sell them to pension plans and the like. FannieMae and FreddieMac have underwriting guidelines that tell lenders what kinds of characteristics they want in the loans they will buy.   In the old days, lenders would give the guidelines to the underwriters, the employees who evaluate loan applications.

Today that has all changed. FannieMae’s computerized underwriting system is called Desktop Underwriter and Freddie Mac’s is called Loan Prospector. They aren’t identical but have many, many characteristics in common.   Because it is much cheaper and faster to use AU than to have a human evaluate applications, most lenders now enter the data from borrowers’ applications into one of these programs through an Internet connection.   The decision comes back with a minute or two.   Compare that with having to wait 30 days.

In addition, the AU decision also spells out the documentation required.   For example, if your credit is clean and you have adequate reserves, it may only require that the lender do a telephone verification of employment.   Compare that with having to provide tax returns and paycheck stubs.   In most cases, there is a substantial reduction in the amount of paperwork required.

It is also possible that the AU decision may only ask for a drive-by appraisal, or, in rare instances, not even require a formal appraisal, accepting the stated value of the property. In either case, your cost will be at least a hundred dollars cheaper than getting a normal appraisal.

But the best news is for the millions of homebuyers who are stretching themselves to get into their new home.   You may have heard about qualifying ratios. Traditionally, the most liberal human underwriting standards limit borrowers to paying no more than 28 percent of their gross income (before deductions for taxes) for housing expenses and 36 percent for housing expense and other debt service.   That means a borrower with $3,000 monthly income and a $250 car payment would qualify for a $90,000 mortgage.  

I’m not quoting investor policy here, just telling you about my experience with these programs. It seems that the new more liberal underwriting standards built into the AU computer program will allow some borrowers to spend half of their gross income on housing expensed and other debt service.   What does this same borrower qualify for now?   $150,000.   Viewed in this light, AU may be the most revolutionary advance in the mortgage industry in years.

AU programs also seem to be more forgiving of credit problems than traditional human underwriters would be.   You have probably heard of FICO scores.   As a general rule, borrowers with scores in the low 600’s would not be approved.   But AU programs seem to approve borrowers with scores even lower than this, if their credit history is clean in the last 24 months.   Older derogatory information will still affect FICO scores, but the AU models seem to look primarily at recent history.

The other good news for borrower is that it costs lenders less to use AU than their traditional underwriting, and some lenders pass on the savings to the consumer.   This doesn’t always happen at banks, but many wholesale lenders offer mortgage brokers discounts for AU loans, and you should be able to talk your mortgage broker into passing on these savings to you.  

What does this mean to you?   Well, assuming that you are interested in a loan amount less than $300,700, the first question you ought to ask a prospective lender is, “Do you use automated underwriting and will I get approval within 24 hours of application?”  

If you have been worried about qualifying, it may be time to gather your information together and find a lender using AU. Your dream home may be closer than you think.