When you’re ready to buy a new home, one of the first things you have to do is take steps to get your financing in place. Mortgage approval is based in part on an automated underwriting process. Unless you plan to pay in cash, you need to secure a mortgage loan. It is beneficial to get a pre-approval letter from a mortgage lender before you even make an offer. Having your loan pre-approved can show a seller you are a serious buyer with adequate funds. You can also reduce the risk of the contract falling through.
Lenders typically use one of two underwriting processes for mortgage loans: automated and manual. Understanding the basics of how these types of loan approval work can give you confidence when applying for your mortgage. You can also have a better idea of which lender to choose when you understand the underwriting process.
How Automated Loan Approval Works
The idea of automated loan underwriting is that a technology driven process makes a decision on a mortgage loan based on programmed algorithms. Automated underwriting is typically used for conforming loan amounts as opposed to non-conforming or jumbo loan amounts.
When you submit your financial information to a lending organization that uses automated underwriting, a computer program goes through your information and generates a loan decision based on a variety of factors, such as the following:
- Credit score
- Monthly debt payments
- Details of the property you want to buy
When it comes to automated underwriting systems, there are two main programs:
- Loan Prospector, the Freddie Mac AUS
- Desktop Underwriting, the Fannie Mae AUS
Depending on how your application stacks up with the algorithm in the AUS, you can get one of three outcomes:
- Approve/Eligible: Pre-approval occurs when you meet all the mortgage guidelines.
- Refer/Eligible: If the computer determines your application can be approved for a loan but doesn’t meet all the requirements for automatic approval, it returns an eligible result and refers the application to a human underwriter. For example, if your application includes a debt-to-income ratio that is above the standard amount programmed into the AUS, you will likely be referred for a manual underwriting review.
- Refer/Ineligible: Applications with issues such as insufficient credit score, recent foreclosure or high debt ratio will usually receive an “ineligible” result.
One of the most common misconceptions about automated underwriting is that it entirely takes the place of a human looking over and signing off on a mortgage. This isn’t the case. Even if your application receives an approve/eligible return from an AUS, a human underwriter will still go through your application to review and approve all the details of your loan.
How Manual Underwriting Works
As stated above, even loans that receive pre-approval from an AUS still go to human underwriters for final review and approval before closing.
Some other situations that may require human underwriting are
- Certain FHA loans
- VA loans
- Loan applications during Chapter 13 bankruptcy
- Mortgage applications immediately following discharge of Chapter 13 bankruptcy
Having a complicated income and/or debt situation may benefit from human underwriting. For example, an AUS may reject your application if you are self-employed and can’t provide traditional W-2 documentation. Counterintuitively, having no debt can also cause you to fail AUS requirements. If you live a debt-free lifestyle, your lack of credit history may not meet the standard parameters in an AUS.
How To Ensure You Get A Mortgage
Choosing the right lender can simplify the process of getting your mortgage. Working with an experienced lender that offers in-house underwriting can present many advantages. When you work with Brian Martucci you also get the benefits of experience and education. From the initial application through pre-approval and all the way to closing, you can ask questions and get personalized service from an expert.
Even if your application fails an AUS, you may still be able to get a mortgage after taking the time to work on your credit score or saving more money. When you work with Brian Martucci you can trust him to take your unique circumstances into account during the loan decision. To get started, schedule a call.