Desktop Underwriter in Real Estate

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DU is an abbreviation used for desktop underwriter and desktop underwriting. It is an automated program used by loan originators to qualify a borrower through Fannie Mae guidelines for a conventional loan. Desktop underwriter is also used for FHA loans.

The DU is only as good as the information supplied to the program. A DU shows the borrower's housing expense ratio and debt-to-income ratio, including 3 FICO scores. Lenders throw out the top FICO and bottom FICO and keep the middle FICO.

The DU also reveals a borrower's assets (source of funds to buy) and liabilities as reported to the loan originator. Liabilities include revolving debt reported to the credit reporting bureaus. The results reflect the borrower's name, the approximate unpaid balance of the obligation, including the minimum monthly payment.

Part of the requirement for desktop underwriter is none of the liabilities can include borrowed funds to purchase the property. Sometimes, if debt does not appear in the desktop underwriter it's because the debt does not yet have a 12-month reporting history. Often disputed unpaid balances will not allow for a desktop underwriter decision without an examination by an underwriter reviewer.

As you can see, it's a very personal look at a buyer's financial situation, without verification. Lenders often will not release a DU to an agent without express authorization from the borrower.

Income Reporting to Desktop Underwriter

Mortgage loan originators ask borrowers to complete a loan application, commonly referred to as a 1003 (ten-oh-three). The income that is reported to desktop underwriter is not verified, and that's an important issue to consider. A seller who wants to review a buyer's DU to determine if the borrower can afford to buy his home does not have the resources to verify, and the lender is not required to verify the income until the loan processing begins.

Some laypeople will look at a DU report and believe the income has been verified when neither the income nor the employment has yet been confirmed. Bear in mind that any gaps in employment during the last two years will require a thorough explanation to get past underwriting.

FICO Scores Reported by Desktop Underwriter

Borrowers sometimes go online and buy FICO score reports because they don't realize the lender will acquire those numbers through desktop underwriter. In addition, the scores a borrower can purchase online are often different than the FICO scores reported in desktop underwriter, so it can be a waste of money on the borrower's part to try to gather that information in advance.

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.

Ratios Reflected by Desktop Underwriter

The 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 can also include private mortgage insurance or mutual mortgage insurance, plus a monthly HOA fee if the home is subject to a homeowner's 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.

Of interest, it's generally not the front-end ratio that kills a loan application, it's the back-end ratio. The back-end ratios include not only the total housing payment but all revolving debt payments as reported to the credit reporting bureaus. A borrower might feel she can handle her existing debt load, but if that ratio is too high, desktop underwriter will not approve the borrower.

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

At the time of writing, Elizabeth Weintraub, CalBRE #00697006, is a Broker-Associate at Lyon Real Estate in Sacramento, California.