What Exactly is a Desktop Underwriting?

How the DU System Affects Potential Homebuyers

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As home sellers become more sophisticated about the process of selling a home, many are asking borrowers to go that extra step and provide a desktop underwriting, or DU, alongside their purchase offer. Before the Internet came along, sellers might have never heard of a DU.

Being familiar with a DU, which is basically a comprehensive risk assessment based on a borrower's credit, and knowing how to interpret its findings are two different things, however. One may still need the services of a mortgage broker to explain the DU in common language.

What Exactly Is a DU?

A DU presents a fairly complete financial picture of the borrower. It is an automated underwriting system that Fannie Mae has approved but it is also used for FHA loans. The initial summary shows the borrowers' ratios, both front-end and back-end ratios.

The front end calculates the percentage of a borrower's gross monthly income that would be dedicated to the mortgage payment, including taxes and insurance. This number is often referred to as the housing expense ratio.

For example, say that a borrower earns about $80,000 a year, which would be approximately $6,666.67 per month. A sum of $2,379.33 of PITI (including private mortgage insurance or PMI) would equate to a housing ratio of 35.69%. If this borrower also has revolving debt that adds up to an additional $252 a month, that would bring the back-end ratio, or the total expense ratio, to 39.48%.

All the Debt Details

Car payments are often the dirty detail that pushes a would-be buyer into ratios too high to qualify to buy a home.

The DU may also call for certain debts to be extinguished or paid off prior to closing. It could disclose a short sale or a foreclosure, which, even though the time frames may be met, an underwriter at the final stages of review could deny the loan.

The DU will list most revolving creditors, the unpaid balances and the monthly payments the creditor expects the borrower to pay. It's a snapshot in time of the financial debt and assets as reported by certain vendors and the borrower on the loan application, which is called a ten-oh-three (1003).

Sometimes a borrower's lender will pull a Loan Prospector or LP. This is used by Freddie Mac, and its requirements are somewhat different. For example, the two-year requirement for employment could be reduced to one year on an LP. Also, if a daughter is purchasing a home with her parents, a lender might use the LP because it allows all parties to qualify as though owner-occupied instead of nonowner-occupied. Owner-occupied interest rates are lower than nonowner-occupied rates.

Using the DU to Give Buyers an Edge

Buyers are often wary about multiple-offer situations and sometimes suspect the odds are against them or an agent is trying to sabotage a transaction, but multiple offers are very real and happen a lot in seller's markets. If you're out looking for a beautiful home, so are 20 other buyers. While not every buyer will tour the home you want to buy, enough of them will generate offers. Just because there are multiple offers is no reason to give up and proclaim defeat. You can win a multiple-offer situation by simply standing apart from the other buyers.

One way to make yourself distinguishable is to show the seller the money. Sellers want to know that the buyer is qualified to purchase their home and dedicated to the process.

A boiler-plate preapproval letter or prequalification letter is not always enough. They all say basically the same thing—that the buyer is qualified providing the property itself checks out and adheres to guidelines. A DU is a way to show them the money. It goes beyond the money, which you can provide by including bank statements, and it shows your financial picture, including your FICO scores.

When a seller reads through a DU they might not understand all of it, but a seller will know that a strong FICO score reflects high creditworthiness. On the other hand, if your FICO scores are lower than the norm, you might not want to provide that information to the seller. This strategy works best among highly qualified borrowers.

You might be wondering why anybody would bother with obtaining a DU to prove qualification for a mortgage when the buyer is putting down 20% or more in cash.

But bear in mind that sometimes a borrower's credit is so bad that the only way a lender will qualify the buyer is if the buyer puts down a big chunk of change. A lower down payment is not always a reflection of poor credit. Take a VA loan buyer, for example, who puts down zero percent.

The requirements to obtain financing without a down payment are generally much higher than for those putting down the minimum amount. The DU simply backs up your claim in black and white, and you can rest assured that another buyer won't automatically think to provide it.