One of the major changes that has occurred in the mortgage lending industry during the past few years is the utilization of computers to underwrite mortgage loans. Hence the name - automated underwriting. The benefits of automated underwriting is significant - faster loan approvals, reduced closing costs, less documentation requirements, and the approval of loan applications that in the past were denied.
Underwriting is the process of approving or denying a loan based on an evaluation of the property and the applicant's creditworthiness and ability to repay the loan. In the past, underwriting was exclusively performed by humans. However, as with many functions, computers can perform these functions faster, more accurately, and in general, better.
The 2 largest mortgage investors - the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) have each developed their own automated underwriting systems for evaluating mortgage loans. Fannie Mae's system is called Desktop Underwriter в and Freddie Mac’s is referred to as Loan Prospector в. These systems employ "artificial intelligence" with a predictive model that assigns a quantitative risk factor to individual mortgage applications.
With these systems, the mortgage broker or mortgage lender enters the loan application data into the automated underwriting system. This data is combined with a credit report. Based on the application data and the credit report information, the system generates a "Findings Report". The Findings Report indicates whether or not the loan application is approved, and if approved, sets forth the documentation required to verify the application data.
The specific benefits to consumers are as follows:
- The approval issued by the system is a binding commitment on the part of Fannie Mae and Freddie Mac, provided that the information that is input into their systems is accurate and documented. Thus, consumers that do business with brokers and lenders that utilize these systems can feel confident that their loan will be provided.
- The documentation that is required to verify the
application data is significantly reduced. For example, in the past the verification of a salaried borrower's income required 2 months of paystubs and the previous 2 year's W-2s. With these automated underwriting system, the typical requirement is only the most recent paystub.
- The time frame to obtain a loan approval is much shorter. The automated underwriting Findings Report is generated within minutes of entering the data. This, combined with the reduced documentation, results in a very short time frame from loan application to loan approval.
- Loans approved via automated underwriting can save consumes money on their closing costs. Appraisal fees range from $225 - $300 instead of the typical charge of $350 - $375. The cost of the credit report is $20 - $25 rather than the standard $65 - $90 for this item.
- Probably the most important benefit of automated underwriting is that many consumers that in the past would be denied a loan are now approved. This is especially true of consumers that have very good credit but who may have limited funds for a downpayment.
A useful feature of these automated underwriting systems is that it allows for a loan application to be submitted without a property being identified. This is particular useful for consumers that are shopping for a home as it provides them with a powerful negotiating tool with property sellers.
Not every broker or lender has access to Desktop Underwriter в or Loan Prospector в. and very few have access to both systems. Before submitting a loan application, consumers should ask the broker or lender if they utilize these systems. Brokers and lenders that utilize these systems demonstrate that they are using state-of-the-art technology and are committed to providing exceptional service with lower costs.
At Reed Mortgage, we have access to both Desktop Underwriter в and Loan Prospector в .
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