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Chances are, when you apply for a mortgage, your loan will be underwritten immediately by a computer.

While automated underwriting will not solve every loan problem, it certainly makes buying a home faster, better, and cheaper for most homebuyers.

According to Carol James, regional operations manager for Chase Manhattan Mortgage in Florida, the majority of loans originated by Chase are sent through Chase's "Zippy" automated underwriting system. Customers are getting answers about their mortgage application well within an hour.

Loan officers equipped with laptop computers take borrower information right in the homebuyer's living room. They then transmit the loan application via phone modem to a centralized computer system that will do the underwriting.

Answers generally are returned within a few minutes.

Two of the most commonly used automated systems are run by Fannie Mae and Freddie Mac. These federally chartered, stockholder-owned corporations are the largest purchasers of mortgages in the United States. Fannie Mae calls its system "Desktop Underwriter," while Freddie Mac uses "Loan Prospector."

While neither agency makes loans to the public, they buy loans from lenders who do, such as banks.

Most major lenders have already developed their own automated underwriting systems. But they still utilize the huge databases of information that both Fannie Mae and Freddie Mac have accumulated over the past 50 years.

Whenever a lender calls in with financial information about a prospective homebuyer, the data is absorbed in Fannie Mae's or Freddie Mac's underwriting program. (The system is considered to be a form of artificial intelligence.)

The agencies can then analyze homebuyers' finances - past and present - and better predict whether they will be able to pay off a new mortgage.

Even with this new system, the most important factors Fannie Mae considers when examining mortgage applications remain the size of a borrower's down payment, credit history, and cash reserves after closing.

Other factors include a borrower's debt-to-income ratio, employment status, the length and type of loan, the type of home being purchased (condo, town house, single home), other parties involved in the loan, past bankruptcies, and any mortgage delinquencies.

Another possible consideration: the likelihood of real estate appreciation in the locale of the home being purchased.

The automated system takes all these variables into account at one time, rather than looking at each one separately.

So for borrowers with good credit, the automated system allows higher debt-to-income ratios than conventional underwriting. That means a borrower might qualify for a larger loan than someone with the same income and poorer credit.

Some other advantages of automated underwriting:

*It requires less documentation. "Where three months of bank statements and pay-check stubs are required for conventional underwriting, only one month is typically required by the automated system," says Ms. James.

*Borrowers are being approved for loans that they would have been turned down for just a year or two ago.

"By analyzing the credit assessments done by Desktop Underwriter, we found that lower-income families have credit histories that are just as strong as wealthier families," said Fannie Mae chief executive Frank Raines in a speech to the National Association of Home Builders. As a result, 44 percent of Fannie Mae's business is now conducted with low- and moderate-income families. Mr. Raines added that having a strong credit history could offset the need for a large down payment.

"This allowed us to finance loans with down payments as low as 3 percent, and expand our purchase of these loans by almost 40 times during the '90s, to almost $4 billion last year," he says.

*Borrowers will save money because of the power of the computer to do a complete analysis - risk factors can be offset by borrower strengths in other areas. Freddie Mac predicts that borrowers will save $100 million in interest as more people qualify for loans that carry lower rates.

While those with weaker credit will still pay more for loans, Freddie Mac projects that automated underwriting will save such borrowers almost $2 billion in closing costs each year. This is a direct result of reduced credit-report expenses and the use of abbreviated and cheaper appraisals.

*FHA and VA loans are now being underwritten by these automated systems, allowing for the same benefits of speed and consistency.

For those who want to learn more, Fannie Mae's Web site offers a downloadable brochure that explains how automated underwriting works for the borrower


(c) Copyright 2000. The Christian Science Publishing Society

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