In the 1970s, there was a popular rock music song called "Feel Like a Number." This may be how the average mortgage applicant feels today when trying to buy or refinance a home. Since Fannie Mae and Freddie Mac are the two largest mortgage purchasers in the United States today, their influence on the home finance market is widespread. Many mortgage lenders have their own underwriting guidelines, but they must ensure their loans meet Fannie Mae and Freddie Mac's standards. The main way bankers make sure their loans are compatible with purchasers like Fannie Mae and Freddie Mac is to use automated underwriting. However, automated underwriting may leave some borrowers out in the cold with a declined application. Declined loans have a second chance with manual underwriting.
Automated underwriting systems are formula-driven and do not allow for judgment calls. Though human eyes still review each application, the decision is mostly made by computer. If a borrower has suffered a recent job loss or illness, for example, but is back on solid ground financially, his credit score may have dropped. If the score has fallen below the minimum allowed by an automated system, the borrower will be declined. Manual underwriting is especially helpful when a credit score is close to the guideline but still short of the approval threshold. In such cases, the banker could still get the loan approved by verifying the applicant's payment history in place before the negative event.
No Credit Score
Some people (like young borrowers just old enough to buy their first house, or recent immigrants to the U.S.) may not yet have a credit score. Or, they may have recently started their first adult job. Without a credit history or long-term employment record, they will have a hard time meeting automated underwriting requirements. Manual underwriting allows a lender to take into account other proofs of ability to make steady payments. Examples include rent, utility payments, or private loans that are not reported to a credit agency.
Some applicants have such negative events in their credit histories, they'll only qualify with an intense manual underwriting process. The most serious discretionary case -- and the most difficult to overcome -- is a bankruptcy. Other cases needing human judgement, rather than computer scoring, are previous foreclosures and overseas work where the borrower has no U.S. payment history, for example. These are cases where, with manual underwriting, a lender can look at compensating factors. The borrower may have a high-balance savings account, for example, or a family member guaranteeing the loan -- two circumstances that make a banker more comfortable.
Policy exceptions can involve an otherwise creditworthy applicant who needs special consideration. Examples are when the loan size, loan-to-value ratio, or amortization term exceed Fannie Mae/Freddie Mac guidelines. Since they cannot be sold on the secondary market, these types of loans would have to stay in the lender's portfolio. Manual underwriting will allow the lender to make a judgmental approval based on the borrower's financial strength, rather than an automated computer model.
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