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Automated Underwriting

Traditional underwriting is a system based on rules – thousands of rules! Fannie Mae, Freddie Mac, and the other investors who buy mortgages have set the rules. This chapter describes many of the important rules that lenders must follow. Mortgage lenders must devote several bookshelves to the manuals that govern what they must do before approving a mortgage. There are literally thousands of pages of rules that lenders must know and follow to properly prepare all of the paperwork for your mortgage. The cost of doing this paperwork ranges from $500 to $1,000 per loan depending on the complexity of a borrowers' credit situation and how efficient the lender is at gathering the necessary information.

Automated underwriting programs are based on statistics. They use some of the same rules that are in the manuals, but not all. They are statistical models that compare data about loan applications to data about millions of loans that were made over the last several years. These programs predict how likely it is for your loan to be repaid based on how loans with the same characteristics have done in the past.

Over 95 percent of mortgage loan applications today are submitted to an automated underwriting system. In a few years, automated underwriting will largely replace traditional underwriting. Fannie Mae's automated underwriting system is called Desktop Underwriter and Freddie Mac's automated underwriting system is called Loan Prospector.

Automated underwriting programs make the decision on whether you are approved for the mortgage that you apply for. They also tell the lender what documentation is needed, such as bank statements or pay stubs.

Of what immediate value are these programs to you? The primary benefit to automated underwriting is speed and convenience. If your lender is automated with software and hardware that allows it to submit your application to either Fannie Mae or Freddie Mac's automated underwriting programs, you can get your loan approval within a few minutes after completing your application interview and getting your data entered into your lender's computer. Many loan officers now carry laptop computers that let them enter your data during the interview.

Over 50 percent of the applications that are submitted to the automated underwriting programs get instant approvals. The other 50 percent are not necessarily denied, but the automated underwriting programs simply determine that additional information is necessary to make a decision and that human judgment is necessary.

Automated underwriting changes the way that you get a mortgage as follows:

• Lower mortgage cost – By eliminating paperwork, the cost is reduced by as much as $1,000. If your loan is approved

with few paperwork requirements, your lender saves time and money.

• Greater certainty of approval – More borrowers are approved by automated underwriting systems than are approved by manual underwriting. Automated underwriting sometimes approves loans that would be rejected by rules- based underwriting. Loan applications that fall outside the rules may be good loans, and automated underwriting systems bend the rules, whereas human underwriters are more reluctant to do so.

• Faster approvals – The traditional manual process of preparing and approving mortgage loan applications takes about three to six weeks. Automated underwriting returns an answer in minutes.

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