Automated Underwriting Explained
What is DU, LP and an Automated Underwriting System (AUS)?
An AUS is an automated tool that assists lenders in the underwriting of Conventional, FHA and VA, and USDA mortgages. Fannie Mae’s system is Desktop Underwriter (DU) and Freddie Mac’s system is Loan Prospector (LP). There is also (GUS) for USDA loans.
The broker or lender electronically uploads loan application information, credit report, and loan type requested to the Automated Underwriting System. The AUS then processes the information and determines the eligibility of a potential loan and lists supporting documentation required and the steps necessary for final approval.
The AUS analyzes your credit and will also determine your qualifying ratio which is your total monthly liabilities divided by your total monthly income. This is also known as your “back end” ratio vs “front end” which only considers housing expense.
1. Total liabilities.
a. Your total proposed housing payment “PITI” - Monthly mortgage payment (principal, interest, taxes and insurance) and if applicable, mortgage insurance and homeowner’s association dues
b. Plus, all other monthly debt- Installment and revolving loans, and if applicable alimony and child support payments. Deferred student loans may also be included in this total
2. Total income
a. Salaried employees – gross monthly income
b. Self-employed- typically a two year average
c. Retirement Income - gross monthly income per award letter
d. Other income may be used, depending on type and length it will continue
Visit How the Underwriter Will Calculate Your Income for more on the above.
It will also determine if you have a reserve requirement which are funds remaining in savings after closing. If your new housing payment is $3,500 and you have $7,000 in savings after subtracting funds needed for closing, you have two months of reserves.
If the borrower has a high FICO score the debt ratio may be approved up to 50% on Conventional and FHA, and up to 60% on VA loans. Documentation requested may also be limited, depending on a case by case basis.
In addition to the AUS approval, lenders may have their own underwriting “overlays” which are additional internal guidelines that must be met in addition to what’s been determined by the automated system.
If a loan falls outside of the automated underwriting parameters, it may be eligible for “manual underwriting” and the file will be reviewed by the lender’s underwriter to determine if it meets guidelines specific to the loan program.