Most every financial transaction today is performed electronically. Checking out at the line in the grocery store, opening up a new savings account and other common financial tasks. One of the more complex financial tasks, mortgage loans, are also approved electronically using what is called an Automated Underwriting System, or AUS. How does an AUS work and how does it help streamline the approval process?
The applicant first completes an online loan application at the lender’s website. Or, if the application is taken face to face with the loan officer the application is converted from a handwritten form and transferred to the lenders’ loan origination system when then converts the file to a digital file an AUS will accept. Prior to the introduction of automated systems, it would take days just to even get the file in a position to be underwritten. Back then, loan officers would ask for as much upfront documentation as possible, just in case an underwriter wanted more information or had questions about a file. Today, an automated submission can be reviewed and approved in a matter of moments. The results are called “findings.”
There are two primary types of automated underwriting systems, one from Fannie Mae referred to as the Desktop Underwriter, or DU and one from Freddie Mac going by the name Loan Prospector, or LP. Each system quickly evaluates an electronic application within a matter of moments and while both systems approve conventional loans they do have some differences that reflect those that Fannie and Freddie have. That’s why a loan officer will know in advance which system to use based upon the nature of the initial loan application.
Once the file is submitted, the AUS returns with an answer. However, instead of loading up on documentation before the file is reviewed, with an AUS the system works in reverse. Now, the loan officer collects only the items listed on the findings. This speeds up the process significantly by keeping paperwork to a minimum allowing the loan to be more quickly reviewed by the underwriter. The loan officer or loan processor contacts the borrowers after a review of the findings and then includes those additional items in the loan file. It is now the underwriter’s job to determine that the file follows program guidelines and the additional information matches with what the findings are requesting.
An AUS quickly reviews current debt, current monthly credit obligations in addition to the new mortgage, property taxes and insurance. The AUS does not review a credit report line item by line item but instead relies more on credit scores and any public records. If there are any public records such as a bankruptcy in most instances the loan will need to be underwritten manually.
Automated underwriting systems both speed up the loan approval process while at the same time keeping a strong hold on quality control. When lenders use both an AUS as well as an underwriter, fewer loans go into eventual default and the quality of closed home loans has risen over the years.