Monday, October 13, 2008

Online Underwriting Systems

Ever think you had a mortgage approval and then find out you didn't?

Fannie Mae and Freddie Mac (the two biggest mortgage purchasers), FHA, and VA are very interested in making sure that doesn't happen. Each of these entities has online underwriting software that will approve a mortgage in minutes.

The names of the software programs are Desktop Underwriter (Fannie Mae's version, referred to as DU), and Loan Prospector (Freddie Mac's version, referred to as LP). DU and LP provide access to the FHA and VA systems as well.

When using the software, the borrower's loan information is entered into the online system, a credit report is pulled, and the approval results are available in seconds. As long as the information entered in the software is accurate, the loan is good.

In addition to getting a fast, accurate pre-approval, here are some other advantages of using DU and LP:

-- Reduced income and asset documentation. When a loan is submitted to DU or LP, the report issued by the system (known as the "findings") will list the required documentation. Depending on the credit score and overall strength of the file, we often see a "verbal verification of employment" as the only thing required -- no W-2's, no pay stubs, no taxes, no bank statements.

-- Higher debt-to-income allowances. If a loan is submitted to an underwriter without first submitting it to DU or LP, the lender is obligated to limit the borrower to the debt-to-income ratio listed in the underwriting guidelines. However, if the underwriting software determines that those limits may be exceeded (and it almost always does), Fannie Mae, Freddie Mac, FHA, and VA will still purchase the loan. This increases the number of approvals tremendously.

-- If the loan is not approved by the software, we are given the reason for the denial. Very often, loans are denied because the borrower has inadequate cash reserves. If that's the case, we can add more reserves, resubmit the loan, and get the approval. Sometimes, just one more month's reserves will mean the difference between getting a loan and not getting a loan. Of course, the borrower must actually have the reserves, but some loan programs allow gifts from relatives to be used for reserves!

We always run every loan through the online systems. That way, there's no guess work. It saves us an enormous amount of time because we aren't sending loans to undwrwriting that have no chance of getting approved, and it is really good for business when all our loans close.

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