Automated underwriting has emerged as one of the most significant transformations in the mortgage lending industry over the past several years. This process leverages computer technology to manage the underwriting of mortgage loans, offering several advantages to both lenders and borrowers. These benefits include reduced closing costs, faster loan approvals, fewer documentation requirements, and approval for some applications previously denied by human underwriters.
Underwriting is the method by which underwriters determine whether to approve or deny mortgage loan applications. The method involves assessing mortgage loan applications by evaluating the property, the applicant’s ability to repay the loan, and the creditworthiness of the individuals seeking the mortgage. Traditionally, this task was exclusively performed by humans. However, recent advancements have demonstrated that computer programs can execute these tasks more swiftly, accurately, and efficiently.
Automated underwriting systems now handle a substantial portion of this work. The two largest mortgage investors in the United States, Freddie Mac and Fannie Mae, have each created their own proprietary systems for evaluating mortgage loans. Freddie Mac’s system is called Loan Prospector, while Fannie Mae uses Desktop Underwriter to fulfill similar functions. Both systems use predictive models to assess specific mortgage applications and calculate a quantitative risk factor.
The application process for automated underwriting systems is streamlined and user-friendly. The lender or mortgage broker collects information from the applicant and enters it into the system, which then retrieves a credit report. Using the credit report and application data, the system generates a Findings Report. This report indicates whether the loan application is approved and lists the required documents for data verification.
Consumers stand to gain significantly from these automated systems. The approvals issued by these systems represent binding commitments from either Freddie Mac or Fannie Mae. This means that if the information submitted is accurate and can be properly documented, borrowers can proceed with confidence, knowing that their loan will be issued. Another major advantage is the reduction in paperwork and documentation requirements. While human underwriters typically request two months’ worth of pay stubs, the new automated systems often require only a single pay stub.
The efficiency of automated underwriting systems has led to notably shorter approval time frames. The Findings Report is typically generated within minutes of the lender entering the information into the system. The reduced documentation requirements further contribute to expediting the overall process. These time-saving benefits translate into cost savings for consumers. For instance, appraisal fees are often $100 less than traditional methods, credit report costs can be reduced by $50 or more, and loan origination fees may also be lower.
The most significant advantage of automated underwriting systems is their ability to approve loans for consumers who might have been rejected under traditional underwriting methods. This is particularly beneficial for applicants with excellent credit but limited down payment resources. The automated system’s model assigns less importance to the full down payment amount compared to human underwriters.
Another helpful feature is its flexibility regarding property identification. Human underwriters normally require the specific property for mortgage to be stated on the application; these new systems do not have such. This proves advantageous for consumers who are still in the process of house hunting. Once approved by the system, these potential buyers gain a powerful tool for negotiating deals with property sellers.
Automated underwriting represents a significant leap forward in the mortgage lending industry, offering a more efficient, accurate, and inclusive approach to loan approval. As technology continues to evolve, it is likely that these systems will become even more sophisticated, further streamlining the mortgage application process for lenders and borrowers alike.
