Automated Underwriting System Used By Mortgage Lenders

by Gustan Cho

This Article On Automated Underwriting System Used By Mortgage Lenders

All lenders use the automated underwriting system on government and conventional loans before proceeding to the next step of the mortgage process. The automated underwriting system is commonly referred to as AUS.

There are two different versions of the automated underwriting system:

Purpose Of The Automated Underwriting System Used By Mortgage Lenders

What is the purpose of the automated risk rating system used by mortgage lenders

Both Fannie Mae’s DU and Freddie Mac’s LP AUS is a sophisticated computer system that can render an automated decision on whether or not a borrower meets the minimum agency mortgage guidelines on FHA, VA, USDA, and/or Conventional loans. The loan officer will input the borrower’s mortgage loan application (1003), tri-merger credit report, and other data into the automated underwriting system. Within seconds, the automated underwriting system will render its findings. The automated underwriting system is similar like a sophisticated computerized brain that has been programed with all the recent agency guidelines on each loan program. The algorithm knows every aspect of each agency’s mortgage guidelines. The findings will render an approve/eligible, refer/eligible, or refer with caution. In the next paragraph, we will go over what the three findings of the AUS mean and how lenders proceed with each findings.

Analyzing The Automated Findings Of The AUS

The loan officer enters the borrower’s mortgage loan application, tri-merger credit report, and other data in the automated underwriting system (AUS). Within seconds, the AUS will enter one of three findings:

Approve/Eligible per AUS:

  • An approve/eligible is what you are hoping for
  • An approve/eligible means the borrower meets all the agency lending guidelines of the loan program requested for an automated approval

Refer/Eligible per AUS:

  • A refer/eligible AUS Findings mean the borrower may be eligible for a mortgage
  • However, the automated underwriting system cannot render an automated approval
  • The borrower can be approved if a human mortgage underwriter manually underwrites the file
  • Refer/Eligible AUS findings can be manually underwritten
  • However, only FHA and VA loans allow manual underwriting
  • Conventional loans do not
  • USDA does not allow for manual underwriting
  • Only FHA and VA loans allow for manual underwriting

Refer With Caution:

  • A refer with caution per AUS Findings mean the borrower does not qualify
  • A refer with caution findings is common if the AUS detects the borrower has not met the minimum waiting period requirements after bankruptcy, foreclosure, deed in lieu of foreclosure, short sale
  • The loan officer can analyze and review the AUS Findings and see if there were any errors in inputting the data, check for dates, and go over the borrower disclosure form on the YES and/or NO boxes checked

There are ways of trying to get a refer/eligible and/or refer with caution findings to an approve/eligible AUS findings. We will discuss and cover this topic on the next paragraph.

Solution In Trying To Get A Refer/Eligible and Refer With Caution To An Approve/Eligible Per AUS

What is the solution in trying to get a referral / eligible and refer cautiously for approval / eligible for AUS

Experienced loan officers can try to analyze why the AUS did not render an approve/eligible per AUS. The loan officer can try playing around with the data and see why the AUS did not render an approve/eligible. The AUS will render an automated decision with the data being entered.

The loan officer can try the following and see what the AUS renders:

  • Try a higher down payment
  • For example, on FHA loans, instead of a 3.5% down payment, try a 5% or 10% down payment
  • Try adding reserves such as three to six months in reserves
  • If the down payment is gifted, try to enter the down payment and closing costs as own funds
  • Gift funds are not viewed favorably
  • If the borrower has late payments after bankruptcy and/or a housing event, try switching from DU AUS to LP AUS and/or vice versa
  • There are times where Freddie Mac LP AUS is more favorable on late payments after bankruptcy and/or foreclosure versus Fannie Mae DU AUS and vice versa

You will be surprised on how using a few tricks of the trade, a refer/eligible AUS findings can become an approve/eligible per AUS.

The Difference Between Manual Versus Automated Underwriting System

FHA and VA loans are the only two home mortgage program that allow manual underwriting.

  • There is not too much difference between manual and AUS approved underwriting
  • The main difference is on manual underwriting, there are debt to income ratio caps that is recommended by FHA and VA
  • Both FHA and VA manual underwriting guidelines are the same
  • VA loans do not have a maximum debt to income ratio cap with an AUS approve/eligible
  • However, the maximum debt to income ratio recommended on manual underwriting on FHA and VA loans depends on the number of compensating factors
  • Compensating factors are positive factors borrowers have that lessen the risk of lenders

Examples of compensating factors include the following:

  • Payment shock of lower than 5% where the new housing payment is less than a 5% increase of the previous rental payment
  • Part-time and/or other income borrower makes but not being used for qualifying income
  • The borrower having a history of saving money 
  • The borrower having a history of getting consistent job promotions and wage increases
  • Three months or more of reserves (one month of reserves is equivalent of one month’s of principal, interest, taxes, insurance (P.I.T.I.)
  • Non-borrowing spouse with a full time job

Normally, most lenders will require verification of rent on all manual underwrites. However, Capital Lending Network, Inc. will waive verification of rent from borrowers who are living rent free with family to save money for their down payment and closing costs on a home purchase. We will provide a living rent-free with family form that needs to be completed, signed, and dated by the family member who the borrower is living rent-free.

Debt To Income Ratio Caps On Manual Underwriting

What is debt to income ratio is limited in the case of manual placement

Here are the recommended FHA and VA manual underwriting guidelines on debt to income ratio caps:

  • The maximum front end debt to income ratio capped at 31% and maximum back end at 43% with zero compensating factors
  • The maximum front end DTI capped at 37% and back end at 47% with one compensating factors
  • The maximum front end DTI capped at 40% and back end DTI at 50% with two compensating factors

Mortgage underwriters have a lot of underwriter discretion on manual underwrites. Mortgage underwriters can go above the above maximum debt to income ratio caps for borrowers with multiple strong compensating factors. This holds especially true on VA loans.

17 comments

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17 comments

Margaret Winters December 5, 2020 - 7:26 pm

Great informative article. I really appreciate Capital Lending Network. The information on this website at Capital Lending Network is straight to the point and informational and not like other websites where they just advertise and do not know what they are talking about. I got denied by my bank and I’m wondering if I would ever be able to get an FHA loan. I have a charge off on my credit report as well as inquiries and a Chapter 13 bankruptcy that received a discharge from last the summer of 2019. Now I’m trying to repair my credit but I’m not sure if I really need to. The bank took my middle score which was a 648 but then told me that I need to wait another year because of the charge off and a few other items.

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Elizabeth Cox December 6, 2020 - 2:35 am

Beginning my search for a multifamily property in Chicago. Likely a 3+ unit property. Would prefer to go FHA due to the lower down payment requirements but know the self sufficiency test can sometimes cause issues. Looking for guidance on the best options for a mortgage that doesn’t require 25% down. Will not qualify for Home Possible due to income limits.

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Sharon Henderson December 6, 2020 - 3:07 pm

Hello,
I need to refinance my home to lower the interest rate, I have a steady IT full-time job, having the latest credit score of 865, and the value of the house is 230,000. Please let me know the rate of interest and closing cost if any.
Thanks,

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Mike Leer December 6, 2020 - 3:09 pm

I saw your YouTube videos and liked them a lot.

I am planning on buying a new home in June of 2021 but because I am self employed and have not filed my taxes, I need some advice from you.

Best regards
Mike Leer

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FHA Loans With 500-579 FICO Credit Scores Mortgage Guidelines December 9, 2020 - 9:19 pm

[…] Can I Get Approved For An NMLS MLO… Credit Scores Used By Lenders To Qualify Mortgage… Automated Underwriting System Used By Mortgage Lenders Can I Get Approved For An NMLS Loan… HUD Guidelines On Collection And Charged-Off Accounts […]

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Piotr Bieda December 14, 2020 - 9:42 pm

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sikis December 18, 2020 - 10:54 am

Excellent. A book begins with a word, and a sentence . . . Christabel Durante Billmyre

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erotik December 18, 2020 - 1:13 pm

Thanks for the article post. Really looking forward to read more. Much obliged. Yevette Ferdie Perzan

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sikis December 18, 2020 - 4:12 pm

I believe this site has some real wonderful information for everyone :D. Clarette Stanley Singh

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Mitzy Canterbury December 20, 2020 - 11:14 pm

Nice response in return of this query with firm arguments and describing everything about that. We are currently preparing to sell our home to relocate and need new carpet throughout, rooms painted, basic maintenance to prepare for sale, etc. The equity in the home is roughly $200,000+ and we can sell the home for an estimated amount of $580,000. Houses in the area are moving pretty quick therefore we are motivated to close within 30-60 days and need a loan to move forward to the next steps. We have been in the home for 6 years and we have recently endured some employment challenges over the last 2 years therefore credit scores have taken a hit.

Not exactly sure if we should utilize a HELOC or FHA 203k loan, please advise. Thanks for your time.

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Margo Suttenberg December 21, 2020 - 6:05 am

Thanks for the blog. Much thanks again. Really Cool. I appreciate Tammy Trainor’s informative content on her blogs. Keep up the great work, Tammy.

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Christine Holiday December 21, 2020 - 9:55 pm

Enjoyed reading through this, very good stuff, thanks. Marita Frasier Gare. Want to thank the author on how he made us viewers with little knowledge in mortgages have an easy time understanding reading these informative articles.

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Lisa Jones Brown, M.D., SC, Ltd November 7, 2021 - 2:02 am

Trying to buy a house and my credit score is a 601. Which I don’t understand because I ran my credit report and Experian is 662, TransUnion is 655, and Equifax is 631. Can you help me? There is a house I am trying to buy.

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Mary Anne Brown November 7, 2021 - 2:22 am

I would like to see if I qualify for a house and what are the do’s and don’ts between being approved and closing.

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Brendan O'Conner November 8, 2021 - 10:45 pm

Very good information. Lucky me I discovered your website by chance (StumbleUpon).
I have saved it as a favorite for later!
Good morning,
We would like to know if you are licensed in Arizona.
We are in Chapter 13 and looking to refinance. We owe 15,000 in arrears. My Husband is a veteran.

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Gustan Cho November 9, 2021 - 2:47 pm

I’m so sorry I missed this. Please call me on 630-659-7644 anytime tomorrow. I just ran out for the evening.

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Amy Lockheed January 11, 2022 - 3:10 am

I would like to purchase a home using my VA Loan, however my credit score is close but not to where it should be. I have paid my debts. I just had to help family during COVID therefore it affected my personal finances. I did recently sell my home for a job relocation, it was a VA Loan I used when I built that home. I’m retired Army, and work for the Department of Defense.

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