What Is a DU Approval in the Mortgage Process?

The mortgage application process can seem complicated, but understanding key components like Desktop Underwriter (DU) approval helps clarify the journey. DU approval represents an initial, automated assessment of a borrower’s eligibility for a home loan. It streamlines the mortgage process by quickly evaluating applications and providing lenders with a preliminary indication of a loan’s likelihood of approval. This automated step sets the stage for subsequent stages of review.

Understanding Desktop Underwriter (DU)

Desktop Underwriter (DU) is an automated underwriting system (AUS) developed by Fannie Mae. Its function is to quickly and consistently assess mortgage loan applications by analyzing various data points against predefined criteria. DU helps lenders evaluate credit risk and determine a loan’s eligibility for sale to Fannie Mae. This automated approach offers advantages over traditional manual underwriting, including increased speed and objectivity in loan application assessment. DU provides guidance for both purchase and refinance loans.

Information DU Analyzes

The DU system processes borrower and property information for its assessment. It scrutinizes the borrower’s credit profile, including credit scores, credit history, payment patterns, and any delinquent accounts or public records. DU also verifies income and employment details, assessing stability and source of funds. It can incorporate consistent rent payments from bank statements, benefiting applicants with limited traditional credit history. The system examines assets, such as funds for down payment, closing costs, and financial reserves.

DU analyzes the debt-to-income (DTI) ratio, which compares a borrower’s total monthly debt obligations to their gross monthly income. Lenders prefer a lower DTI ratio, as it indicates less risk. Additionally, DU evaluates the loan-to-value (LTV) ratio, which is the loan amount compared to the property’s appraised value. It also considers property characteristics like the type of property and occupancy.

Interpreting DU Findings

The DU system generates findings that guide lenders in evaluating risk and eligibility. An “Approve/Eligible” outcome indicates the loan meets Fannie Mae’s eligibility criteria and is a strong candidate for approval. This suggests the loan appears to meet agency requirements. However, an “Approve/Eligible” finding is not a final loan commitment, as a human underwriter still reviews the file to verify information.

A “Refer/Eligible” finding means the loan meets some basic eligibility criteria but requires further manual review by a human underwriter. This outcome occurs due to specific characteristics or conditions, such as insufficient credit history, recent late payments, high DTI ratios, or unique property features. A “Refer/Ineligible” or “Refer with Caution” finding indicates the loan does not meet Fannie Mae’s eligibility or credit risk standards and is unlikely to be approved without significant changes or exploring a different loan product. A “Refer with Caution” loan is not eligible for sale to Fannie Mae as a DU loan.

Next Steps After DU Findings

Following DU findings, actions vary based on the outcome. For an “Approve/Eligible” finding, the loan proceeds to document verification, property appraisal, and a final manual underwriting review. All submitted information must be verified by the lender.

If the DU system returns a “Refer/Eligible” finding, a human underwriter conducts a detailed manual review. This may involve requesting additional documentation or explanations from the borrower to assess creditworthiness. A borrower may still be eligible for a mortgage through manual underwriting, particularly for certain loan types.

For a “Refer/Ineligible” or “Refer with Caution” finding, the loan does not meet Fannie Mae’s guidelines as submitted. Options include the loan officer working with the borrower to improve their financial profile, such as reducing debt or increasing reserves, or resubmitting the application with updated information. Borrowers may also need to explore alternative loan products.