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"Manual" Underwriting Is Rare.

The problem with not getting an AUS approval is that most lenders will simply decline a loan application instead of underwriting the loan manually, page by page. When lenders receive an AUS, they get a printout of the required documentation on that loan. As long as the loan is documented in accordance with the AUS decision, it is eligible to be sold on the secondary market, so the lender can make more loans. If, however, the loan is approved manually, without an accompanying AUS approval, lenders are less likely to approve the loan. If the loan should ever go bad, the original lender must be able to validate why it overruled an AUS "decline" and approved the loan anyway, ignoring the AUS's advice.

Lenders bought back a lot of loans, and this put many of them out of business. In its zeal to approve loans without regard to an AUS, a lender can set itself up for disaster. Lenders aren't designed to sell and then buy back loans. When they sold the loan in the first place, they did so to get their money back so that they could make still another mortgage loan. When loans start to get returned to a lender, ultimately one or both of two things will happen: Other lenders will quit buying loans from them, and/ or they will run out of cash because now they have lots of loans on their hands and no money in the bank.

But manual underwrites are still around; they're just hard to find. Manual underwrites aren't done in order to override a "decline" by an AUS; they're done to approve a loan that hasn't received an approval. Sound strange?

Say that a loan application is submitted to an AUS but comes back with no credit scores or credit history. This is often the case when someone has been saving up for her down payment and didn't want to open up credit accounts while she was saving the money. For most of us in our consumer-driven economy, it might seem ridiculous that there are people who don't have any credit history at all. But they exist.

If a loan comes back with no scores or credit history, there will be no AUS approval, as scores are a requirement for an AUS. In this instance, the loan is submitted for a manual underwrite using "alternative" credit. With alternative credit, payment histories are derived from nontraditional credit sources, such as utility payments, rent, automobile payments, and even saving on a regular basis. Fannie Mae loans, for instance, make allowances for manually underwritten loans if the applicants can show proof of on-time rent payments and timely payment from four to six other alternative sources, such as cable bills or Internet service.

When these payments are documented, the loan is reviewed by the underwriter, who approves (hopefully) the loan application. As long as the loan meets Fannie Mae guidelines for alternative credit, the file will be approved. Fannie, Freddie, VA, FHA, and US DA all make allowances for manually underwritten loans.

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