How Does Desktop Underwriting Work?

How the DU System Affects Potential Homebuyers

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As the housing market grows ever more competitive, buyers must find more ways to differentiate themselves. Home sellers have become more sophisticated about the process of selling a home, and 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 not have heard of a DU. This quick yet detailed profile of a buyer's financial qualifications provides a reasonably accurate assessment of whether that buyer can get financing to purchase the home.

What Is a Desktop Underwriting?

A DU presents a fairly complete financial picture of the borrower. More generally known as automated underwriting, a DU is a system that many lenders use to quickly review a borrower's financial qualifications and determine their loan terms.

Fannie Mae has approved and uses its own automated underwriting system called Desktop Underwriter. This is also sometimes used for FHA loans.

The software scans and reviews applicant information, such as credit score and cash reserves. It also 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 39.47%.

DU systems can calculate this information quickly, assess a borrower's creditworthiness, and provide swift preapproval for specific loan terms.

Different Requirements for Different DUs

The DU may call for certain debts to be extinguished or paid off prior to closing. It could disclose a short sale or a foreclosure, which could present issues in getting a loan approved, even if all the terms have been met.

The DU will list most revolving creditors, along with the unpaid balances and monthly minimum payments each 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 Product Advisor (LPA), formerly known as Loan Prospector. This is the desktop underwriting 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 LPA. Also, if a daughter is purchasing a home with her parents, a lender might use the LPA 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.

How the DU Can 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 fairly typical 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, though. 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 they 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.

Even when a buyer is putting down more than 20%, a seller may want a DU to prove they're reliable. 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.

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. It gives you a leg up in a competitive market.