What Happens After Automated Underwriting?

Automated underwriting (AU) represents a system designed to rapidly assess a borrower’s creditworthiness and a property’s eligibility for a loan. This technology provides an initial decision, serving as a preliminary step in the mortgage application process. This article guides you through the subsequent steps and processes that unfold after this initial automated decision, leading to your loan closing.

Interpreting the Automated Underwriting Decision

Automated underwriting systems, such as Fannie Mae’s Desktop Underwriter (DU) or Freddie Mac’s Loan Prospector (LP), provide specific recommendations for the loan’s initial standing. These systems analyze various factors, including credit history, income, debt-to-income ratio, and property details. Understanding these outcomes is the first step after your initial submission.

One common outcome is “Approve/Eligible,” which suggests the loan meets the basic criteria for agency purchase and is suitable for automated approval. Even with this decision, the system generates a list of conditions requiring human underwriter verification. This indicates a strong likelihood of approval if all information is substantiated.

Another possible recommendation is “Refer/Eligible.” This means the automated system cannot render a definitive approval but indicates the borrower may still qualify for the loan. A “Refer/Eligible” decision necessitates further manual review by an underwriter to evaluate specific factors the automated system could not fully assess.

A less favorable outcome is “Refer/Ineligible.” This signals that the loan does not meet the automated system’s criteria and may not be eligible for agency purchase without significant adjustments. Such a decision often arises from issues like insufficient credit scores, recent financial distress, or high debt ratios.

Providing Necessary Documentation

Borrowers must gather and submit necessary documentation following the automated underwriting decision. These documents verify information provided in the loan application and address specific conditions generated by the automated system. Accurate and complete submissions ensure smooth progression.

Common documents include proof of income, such as recent pay stubs, W-2 forms from the past two years, and federal tax returns, particularly for self-employed individuals. Lenders also require asset verification through two months of bank statements and statements from investment or retirement accounts. These financial records demonstrate the borrower’s ability to cover down payments, closing costs, and ongoing mortgage payments.

Borrowers should prepare these documents for submission, often by scanning them or uploading them to a secure online portal provided by the lender. Ensuring all pages of statements are included, even blank ones, and that information is legible helps avoid delays. Providing complete and accurate information upfront can streamline subsequent verification processes.

Lender Verifications and Third-Party Engagements

Once documentation is submitted, the process shifts to the lender’s comprehensive review, marking the transition into the full underwriting phase. Even with an “Approve/Eligible” automated decision, a human underwriter reviews all submitted documents. This manual assessment ensures information aligns with the initial application and satisfies all outstanding conditions. For “Refer/Eligible” cases, the underwriter conducts a more in-depth analysis to determine the loan’s viability.

Lenders initiate various verification procedures to confirm the borrower’s financial standing. Employment and income are verified by contacting employers directly to confirm status, job title, and earnings. Lenders may also request recent pay stubs and W-2s, and for self-employed individuals, they require tax returns or profit and loss statements. Some lenders utilize third-party verification services or the IRS Income Verification Express Service (IVES) to expedite this process by directly accessing payroll or tax data.

Asset verification involves confirming the existence and sufficiency of funds for the down payment and reserves. Lenders review bank statements, investment account summaries, and retirement account statements. They scrutinize significant or unusual deposits, requiring borrowers to explain their sources. Digital asset verification provides lenders with faster, real-time access to financial data directly from institutions, which can reduce fraud risk and streamline the process.

A property appraisal is an engagement with a third party, ordered by the lender to determine the market value of the property. This process involves an appraiser inspecting the home and researching comparable sales in the area. The appraisal report, received within 6 to 20 days after the inspection, helps ensure the loan amount is commensurate with the property’s value.

A title search uncovers any liens, encumbrances, or ownership disputes against the property. Following the search, title insurance is required by the lender, protecting them against potential claims to the property’s title. An owner’s title insurance policy, while optional, protects the homeowner’s investment. These policies are a one-time premium paid at closing.

Path to Loan Closing

Once all verifications are complete and all conditions are satisfied, the loan progresses to final approval. This signifies the underwriter’s definitive go-ahead. The lender issues a loan commitment letter, a formal document stating their intent to provide the loan under specific terms. This letter may be conditional, requiring a few final steps, or a firm commitment, indicating all requirements have been met.

Receipt of the Closing Disclosure (CD), a five-page form detailing the final loan terms, projected payments, and closing costs, is a key step. Federal regulations mandate borrowers receive this document at least three business days before the scheduled closing date. This mandatory waiting period allows ample time for review and comparison with the initial Loan Estimate, ensuring transparency and understanding of all financial obligations.

The final stage is the loan signing and funding, conducted at a closing table with a notary public. Borrowers sign numerous legal documents, including the promissory note, which is the promise to repay the loan, and the mortgage or deed of trust, which secures the loan against the property. After all documents are signed and funds are disbursed, the deed and mortgage are recorded with the appropriate local government authority, officially transferring ownership and establishing the lender’s lien.