Automated Approvals & Manually Underwritten Loans....... What is the difference?

[DallasLoanGuy]

There seems to be a confusion between the human underwriting piece of the process and what a manual underwrite is.

So one of the Mods asked me to post this in it's own thread to clear up some confusion between Automated Approvals and Manual Underwrites.

I am sure there will be questions and some things can be added.

Manually underwritten loans aren't all that scary if your loan officer knows loans.

 Please do not ask questions here.... Start your own thread in the forum.
I do not get notified when someone replies here. thanks

This is typically on Govt loans.  Not very many lenders will do a manual underwrite on conventional. (Citi/Wells/Chase type big banks should be able to)

1.  File approved thru automated underwriting(We call it a desk approval.... I approve it at my desk).... human underwriter still verifies all data and accepts DTI as per automated findings(ex.  ratios above 31/43). Bottom line: You still go thru 'human' underwriting.

2.  File approved thru automated underwriting.... but is downgraded to a manual underwrite per some guidelines.... like disputed accounts can get an automated approval file downgraded to a manual underwrite... manual underwriting by a human verifies all data and accepts DTI as per published guidelines.

3.  File does not receive an approve/accept(sometimes called a refer).... File is referred to human underwriter to be manually underwritten to published guidelines.... Not expanded guidelines that automated sometimes allows.

all files('automated approved' and 'manual underwrites') are seen by a human.... a human underwriter verifies things used to get the automated approval.

Most common downfalls to a manually underwritten file: 

1. Stricter DTI  usually limited to published DTI of 31/43.... exceptions to higher limits on strong files with compensating factors

2. Rent payments must be verified

3. U/W more likely to ask for collections to be paid(automated approval findings 'issues guidance' that says collections have been addressed by automated approval and do not need to be paid)

If your file is determined to be a manually underwritten file..... I strongly suggest that you work with a lender that will run your file thru underwriting 'subject to' you finding a home.
Credit is pulled. Rent verified. Tax transcripts are pulled. Employment verified. yadda yadda
Your file is approved with conditions(just like if you were under contract). One of those approval conditions is obbviously that you have an acceptable property that appraises and passes inspection and has no title issues.

I hope this is helpful
DallasLoanGuy

i dont subscribe to this thread.

please start a new thread if you need answers to your specific questions.

you can pm me to alert me to your new thread and questions and i will get en email notifying me to look

[frugalQ]

Great info Dallas!  Thank you!!!

[Revelate]

Dallas,

Would it be possible to give some general examples of files which fall into the 3 categories?  Namely, what causes files to be downgraded or outright not accepted and fall into the second or third category?  Beyond disputes downgrading that is?

Along those lines, I would assume automated is nothing awkward on credit report, scores above some certain level, and easy income verification?

[Peter1142]

What is the difference between downgrading and not receiving an approve/accept (a "refer" is it?)... they seem like the same thing. Is downgrading the automated system approves it but the underwriter manually downgrades it?

[DallasLoanGuy]

Examples of each file......

1. approve/eligible(fannie mae) or accept(freddie mac)
Can be a file with a 610 fico with 8 collections/charge-offs totalling $6000. But has other good factors like a large 401k and long time on the same job or a long credit history. Or extra down payment. I have seen files get refer at 3.5% down and approve at 5% with no other changes to the file. The algorithim is scoring the entire file.
Hard to say what fits.... it is always worth a shot. and if it doesnt approve.... throw some money at it. I play with the files and make assumptions. Funny how people can come up with more down payment or gift funds when it means the difference in approved for a home loan or not.

2. approve/eligible or accept by automated underwriting but is downgraded by the lender for some factor. or downgraded by the u/w at his/her discretion

Most common reasons for a downgrade.
A. disputed acccounts.(fha requires a downgrade for a cumulative of $1000 worth of disputed accounts, but lender can downgrade for less)
B. accounts that were previously disputed yet comments about 'customer disputed' still remain attached to the trade line. lenders play it safe and ask that these comments be removed(because we cannot tell the difference in 'in dispute' and 'was disputed'.
C. Thin credit. less than 3 trade lines with a 12 month history. we downgrade to manual so we can use alternate trades like rent and electric bills to prove a willingness to pay on housing. Lender can still downgrade if you pass this 3 trade line test.... it is underwriter discretion. if you only have 3 credit cards all 13 months old with 250 limits.... expect a downgrade. there just isnt enough for us to hang our hat on(sorry for the Texism)

D. excessive derogatory accounts at u/w discretion
i am sure the other loan officers here can cite more examples i am forgetting.... long day

3. Automated underwriting issues a 'Refer'(refer to manual underwrite)..... note... i have never seen a file denied by automated.... they only refer. A refer is not a 'no'. but it isnt a 'yes' either.
This file, like #2 will require rent verif and will almost always be held to the tight published dti ratios

Sometimes automated will give the reason or at least a clue to why the 'refer'. sometimes not.
Most common reasons imo

A. recent bk

B. fraud alerts or some other weird credit holds
C. thin credit

D. high ltv with little cash reserves with low scores. especially if coupled with thin credit

While this excercise is a bit of a peek behind the curtain.... there are no absolutes. I have seen some strange stuff 'approve'

[DallasLoanGuy]

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@Peter1142 wrote:

What is the difference between downgrading and not receiving an approve/accept (a "refer" is it?)... they seem like the same thing. Is downgrading the automated system approves it but the underwriter manually downgrades it?

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did the above answer?

basically. automated can approve but lender can downgrade to a manual for reasons spelled out by hud or for lender/underwriter discretion

regardless. the loan officer should be able to FULLY EXPLAIN why it was downgraded by lender.
it just isnt always easy to tell why the automated computer refers though

[DallasLoanGuy]

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@Revelate wrote:

Dallas,

Along those lines, I would assume automated is nothing awkward on credit report, scores above some certain level, and easy income verification?

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i recently did a $450K deal with 5% down CONVENTIONAL....and a 620ish fico.......  but their were other compensating factors like cash reserves.... so who knows.

again.... it scores the whole file. so there isnt really a score threshold

10yrs ago i was told by a fannie mae rep that they dont read scores. they score the report themselves. lenders used the scores only for eligibility.  Tthey started reading the scores now though.... and likely score the credit themselves in addition to reading them. Example: A loan get approved but is ineligible to be delivered to fannie mae for sub 620 scores.

[Anonymous]

Hi Dallas...Thank you for providing so much clarification.....

I am currently working on getting "approved/eligible" for a USDA loan.......but my mortgage guy said i need a 640 median for AUS approval.....which i am at about 655 median.....so if you account for a 5% drop from my "soft pulls" and the lenders credit run...... I need to be at least at a 675-680 for all three "stooges"...(CRAs) to try to buy some insurance that i don't go below that 640 threshold.

I do have an IRS lien (filed in March 2007) that will expire in Oct 2016 and i am making payments on that balance and have an installment agreement set up....

My worry is that i will still get "referral" because of the lien but the lender doesn't think it will be an issue.

He said the 640 score takes his "handcuffs" off.....

What is your take on USDA? 

I thought for USDA i only needed 620 median....but he told me if under 640 he can't do much more than $170.0K loan.....

Thank you again for your insight.

[Anonymous]

Question,

If a student refund  of $5000 was deposited in my account on January 2015 , and that cash refund is part of my downpayment , is that allowed ? I am currently in underwriting, My school refunds come in to my checking account that also recieved my W2 Direct deposits. I make decent income month to month and my loan officer thinks my income is ok but we did not talk of the student  loan refund.

IS This an issue in manual Underwriting ? My Mid score is 624 but in the recent days my Mid score has changed to 638 .

[Anonymous]

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kimszoo wrote:.....so if you account for a 5% drop from my "soft pulls" and the lenders credit run......

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I am sure it will be different in each individual case but, for reference, my credit scores were pulled twice in less than a week by a lender and it did not affect my scores at all. Both inquiries show up as hard pulls on my credit report yet my score stayed the same after each pull. Why were they pulled twice in less than a week? I was two points below qualifying level (for a VA loan) the first time but waiting on accounts to report and twenty points above qualifying (middle score) less than a week later when the updated information reported. And I do believe 640 is the middle score benchmark for a USDA loan. A 620 is the benchmark for a VA loan.