- The Washington Times - Wednesday, May 9, 2007

Q:We have made an offer on a home that included a preapproval letter from our

mortgage broker. The letter specifically says that our application has been accepted under the Federal Home Loan Mortgage Corp. (Freddie Mac) “Loan Prospector” automated underwriting system.

The listing real estate agent says the letter isn’t strong enough because the approval is automated, rather than issued manually from an underwriter.

I don’t understand this because we have good salaries, excellent credit and a 20 percent down payment. What more does she want?

A: I have no idea why your agent would have a problem with an automated underwriting approval. Let me first explain how all this works.

Freddie Mac and Fannie Mae are the two largest buyers of home mortgages. They purchase loans in bulk from lenders across the country and package them to be sold as mortgage-backed securities to investors.

Several years ago, both companies created a computer-based underwriting system that enabled mortgage lenders and brokers to receive loan dispositions within minutes. The originating company uploads the application, and the underwriting system pulls the applicants’ credit history and evaluates the application.

Strong applicants who have a large down payment, good income and excellent credit will often be approved with little or no requirement of verification of the submitted information.

Other applications will be accepted but may require a pay stub or W-2 form to ensure that the information submitted is accurate.

Applicants who have less than perfect credit will often receive a so-called “refer” status, which means the application must be reviewed manually. Many “refer” applications are ultimately denied.

It is up to the originating company, whether a broker or lender, to ensure that all information on the application is accurate.

The saying “garbage in, garbage out” applies very well to an automated underwriting approval. If the data is inaccurate or unverifiable, the approval can surely be voided. This is when competence must come into the picture.

If the applicants are salaried or full time and paid by the hour, it doesn’t take a genius to determine household income. A simple pay stub will show the numbers. For assets, bank statements serve as verification.

For self-employed applicants, determining income can be a little bit trickier. Experienced loan officers and processors should still be able to determine the accepted income by examining tax returns. If they are unsure whether the calculations are correct, a simple call to an underwriter will solve the problem.

It seems to me that the listing agent is being paranoid. I might suggest that she telephone the loan officer make sure that all of your information was accurately verified before it was uploaded into the automated underwriting system.

Henry Savage is president of PMC Mortgage in Alexandria. Reach him by e-mail ([email protected]pmcmortgage.com).

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