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Your Loan Isn't Approved by a Person or a Loan Committee Anymore.

It used to be that after you submitted your loan application to your lender, a bunch of people sat around and reviewed your application and your income, looked at your credit report, and decided whether or not to approve your loan. This is not the way it works anymore. Your loan is now approved by a computer program, the automated underwriting system, or AUS.

The first AUS for home loans was developed in the mid-1990s by Fannie Mae and Freddie Mac. Fannie Mae's system is called the Desktop Underwriter (DU), and Freddie's version is called the Loan Prospector (LP). The FHA, the VA, and the US DA now have automated approval systems as well. The FHA calls its AUS program Total Scorecard, and the VA and US DA systems are called GUS, for government underwriting system. This is where the "instant approval" and "apply now; answer in seconds" sort of marketing comes from. Most loans now are approved using this method.

These systems take the information you put on your loan application, pull a credit report along with your credit scores, and issue an approval. Or not. An AUS won't officially "decline" you if your loan application doesn't meet the guidelines, but it won't issue an approval. This may sound like nothing more than a quibble over terms, but it's actually a significant piece of the process.

An AUS will take your loan application, either one that you completed by hand or one done online, and assume that all the information you put in all the boxes is either correct or verifiable. If you say that you have $100,000 in the bank, you make $5,000 per month, and you pay $1,200 per month in child support, then the AUS will input those data, pull your credit scores, and issue your approval. Or not.

All Mortgages Must Be Run Through an AUS.

Receiving an approval from an AUS is now mandatory for every mortgage loan application. Until recently, a loan officer had the choice of whether to use an AUS to approve the loan, but now all loans have to be submitted through an AUS, whether or not the loan is likely to be approved.

When a loan officer initially reviews an applicant's credit report, she should get a good feel as to whether or not the loan will be approved based on the applicant's credit. First, the value of the applicant's credit scores is reviewed. We'll discuss credit scores in detail in Chapter 6. In the past, if the credit scores were relatively low or at the minimum and there were some negative items on the credit report, the loan officer would have had the choice of submitting the loan to an AUS or simply documenting the file and delivering it to the underwriter. Sometimes the presence of an old bankruptcy would lead to a loan application being declined even if the applicant had reestablished credit or the bankruptcy was more than four years old. In such an instance, the file would have been underwritten the old-fashioned way.

There now is no choice; the file must first go through an AUS.

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