An automated underwriting system is a data-driven computerized process of informing a loan applicant whether the application will be approved or denied.
The framework of how dependable this system is highly depends on the credibility of the information provided by the applicant.
Because the bulk of credit assessment work that a bank conducts on a borrower is often standard protocols, it is possible to streamline most of the work with robots in the form of computer programs, and leave qualitative criteria assessment to human judgment.
Using such systems loan officers are able to quickly determine the potential loan of a prospect and advise accordingly.
At the same time, avoid wasting precious time on borrowers who have no chance in hell of obtaining an approval.
The biggest hurdle towards such algorithms is in grabbing the credit history of the applicant.
The credit record of an applicant is material information that can make or break an application.
It can also determine the level of scrutiny the applicant’s will be subject to. Including which level of credit criteria the assessment should be made with.
Because it is illegal in many places to grab a person’s credit record without consent, the lenders needs a borrower’s endorsement in order to obtain these information.
With agreement of applicant, the individual’s credit report is pulled from the credit bureaus.
Because credit scoring, FICO in particular, is systematic, the credit score can be instantaneously be generated when the credit information of the applicant is obtained.
In order to further streamline this process, credit bureaus provide integration of bank systems with their own database so that credit records can be accessed without requiring a manual request.
Once the credit report is established, together with other information provided by the borrower, the system plugs in all the data to work out the lenders’ internal requirements like debt ratios, income ratios, loan to value (LTV) perimeters, etc.
This is why it’s best to maintain a clean credit record and correct credit reporting errors as soon as possible before applying for a mortgage. Or else you might not even get pass the computer.
Other information required includes, but are not limited to:
- Age
- Income
- Job details
- Type of property
- Other debt obligations like vehicle loans and study loans
- etc
When the automated underwriting system approves a loan, nothing is concrete yet. It just shows the likelihood of an application’s outcome.
The computerized approval will be subject to conditions. The main condition being the verification of the accuracy of information provided by the borrower.
When it comes to a mortgage, the estimated value that is put on the property by a qualified appraiser is also a critical element as it directly impacts the LTV.
When a mortgage is approved by the computerized system, the applicant will then be requested to submit valid documentation for verification.
These can include:
- Computerized pay stubs to verify income claim
- Lease agreements to verify rental income declarations
- Identity cards to verify identity and legal names
- Income tax statements
- Personal bank statements
- Agreement of sale to verify a property transaction taking place
- etc
At any point in time, the banker might request additional paperwork should he find it difficult to verify any information.
Once the documentation submissions are complete, the case will then be passed on to the approver for final approval.
If everything fulfills the checklist, the application is stamped and passed over to the underwriter to formalize the loan offer.
The facility letter is then generated ready for customer acceptance.
In the past, this whole process can take as long as 60 days. But with the help of automated underwriting systems, the whole process from start to finish can be as quick as within a day.