What is Desktop Underwriting in Real Estate?

How this automated process can help you get a loan

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Desktop underwriting, or DU, is an automated approval system that calculates whether a loan meets Fannie Mae or, in some cases, Federal Housing Authority (FHA) loan requirements. A DU evaluates a borrower's risk of delinquency by comprehensively evaluating several risk factors. If you can't get an automated approval through Desktop Underwriter (also called Desktop Originator), you may need manual underwriting to secure your loan.

What Desktop Underwriting Reveals

DU sets the industry standard in underwriting mortgages. Since it's automated, it allows loan originators to make qualification decisions using logic and algorithms. It automatically removes considerations such as race, gender, or other prohibited factors.

Desktop Underwriter instead uses relevant data (price, income, assets, debt, and other criteria) to uniformly calculate whether a borrower meets the qualifications for a certain loan. If so, it will issue an automated approval. However, the DU is only as good as the information supplied to the program; incorrect or missing information can damage your chances of approval. Also, Desktop Underwriter does not address whether a loan complies with federal regulations; that part is up to the lender.

What Information Goes Into a DU?

Mortgage loan originators ask borrowers to complete a loan application, commonly referred to as a Form 1003 (pronounced "ten-oh-three"). The following are some pieces of information you can expect to see on a Form 1003:

  • Type of mortgage and terms of the loan
  • Property address and purpose of the loan
  • Borrower information
  • Employment information
  • Monthly income and combined housing expense
  • Assets
  • Real estate owned
  • Liabilities
  • Details of transaction
  • Declarations

The inputs in Desktop Underwriter correspond to these sections of Form 1003.

Note that the income that is reported to Desktop Underwriter is not verified. A seller who wants to review a buyer's DU to determine whether the borrower can afford to buy the home can't verify a buyer's income, and the lender is not required to verify the income until the loan processing begins. If income (or any other information) changes later, the loan casefile may need to be resubmitted to DU.

As you can see, a DU provides a very personal look at a buyer's financial situation. Revolving credit debt, car payments, credit scores—lenders often will not release a DU to a buyer's agent without express authorization from the borrower, because of how private and detailed the information can be.

FICO Scores

You don't need to go online and buy your FICO score report; the lender will acquire those numbers through Desktop Underwriter. Not to mention, the scores you may see in your purchased report often vary from the FICO scores reported in Desktop Underwriter. Save your money, especially since the highest and lowest of the three FICO scores reported are thrown out anyway.

FHA has lower requirements for FICO scores than conventional loans that are sold to Fannie Mae. Borrowers with higher FICO scores tend to receive lower interest rates and more favorable lending terms, whereas borrowers with lower FICO scores tend to receive higher interest rates.

Debt-To-Income Ratios

These ratios are reported as front-end and back-end. Front-end ratios include the entire mortgage payment as a percentage of gross monthly income. The PITI mortgage payment (or principal, interest, taxes, and insurance) can also include private mortgage insurance or mutual mortgage insurance, plus a monthly HOA fee if the home is subject to a homeowners association.

The total housing payment is compared to the borrower's gross monthly income and reflected as a percentage. The lower the percentage, the better the borrower appears as a candidate for a loan. If the ratio is too high, Desktop Underwriter will not approve the borrower.

Generally, it's not the front-end ratio that kills a loan application, it's the back-end ratio. Back-end ratios include not only the total housing payment but all revolving debt payments as reported to the credit reporting bureaus. While you might feel you can handle your existing debt load, you won't be approved if that ratio is too high.

It's not unusual to see back-end ratios creep up to about 50%. If 50% of your gross monthly income is being used to repay debt and a new housing payment, you might prudently question whether buying a home right now is in your best interest. It might be smarter to pay down some of that debt before reapplying for a mortgage.

Getting an Approval

Once your information is submitted into the Desktop Underwriter, it will issue an automatic approval or denial. It will also indicate what documents are necessary to verify the inputs; once the mortgage underwriter has those, the DU can be submitted again. Before the loan can be closed, the DU will list several conditions that must be met first; once those conditions are met, the loan is cleared to close.

For some buyers, especially those in hot real estate markets such as California, having a DU in hand can give them an edge in competing for a house, because it lets the seller know more firmly than a preapproval letter that they are qualified to borrow the necessary amount and move forward with the sale.