Sometimes, for whatever reason, a loan needs to be “manually” underwritten. And when consumers hear that term from their loan officer it can be a little unsettling, if not confusing. Lenders can forget that consumers aren’t necessarily familiar with the internal processing of a mortgage loan application and simply assume they know how loans are approved today. But that’s not necessarily the case.
Today, loans are preapproved with an Automated Underwriting System, or AUS. When someone fills out an online application, the digital file is downloaded by the lender, reviewed and then entered into the AUS. This process is a rapid one, as the “findings” of the submission are returned within a matter of moments. This speeds up the loan approval process tremendously. Prior to the advent of automated underwriting systems, the loan file was documented prior to submitting for an approval. With an automated system, the process is reversed. The loan is submitted for evaluation and documented afterward.
Note, the result of a submission isn’t a loan approval. Instead, it’s provides the lender with guidance on how to properly document the loan in order for the loan to be eligible for sale in the secondary market. It’s the lender that approves the loan, not the AUS.
Most findings run down a basic checklist of items needed and they’re fairly standard. Most recent pay check stubs covering 30 days, W2 forms from the last two years, tax returns and other pieces of documentation are listed.
The lender reviews the list, includes the items mentioned in the findings, and then sends the loan to the underwriter for a final review. This final review makes sure that whatever is asked for by the findings matches up with what is included in the file. Once that determination has been made, loan papers are prepared for delivery to the settlement agent.
But sometimes there’s a hitch. Sometimes the findings come back with a term listed as “refer/eligible.” A submission returned with a response means the lender must make the determination without the benefit of an automated approval. A loan with a refer attached does not mean the loan has been turned down, but there is something that is holding up an automated approval. The lender can review and approve the loan internally and still be able to sell the loan in the secondary market. That is, as long as the item(s) causing the loan to receive such a status have been resolved.
A common reason for a refer status is having a bankruptcy listed in the credit history. For example, there is an FHA loan submitted and a Chapter 13 discharge is showing up in the findings less than two years old. A refer/eligible will be the result because the discharge was less than two years old. Another reason is a thin credit file. A thin credit file is a credit report with very few, if any, open credit accounts.
When a lender receives a refer/eligible, the task is to find other positive aspects of the loan file that compensate for whatever is causing the application to be returned without a preapproval. An extended job history is a compensating factor. Having cash reserves left over after the loan closes is another. Maybe there is another source of regular income that doesn’t have a long enough history of being received.
Borrowers don’t have to figure out on their own how to correct a refer/eligible, the loan officer will be able to provide a list of what is needed. Once the items causing the refer/eligible are included in the file, the loan can then be returned to the underwriter for a final review and ultimate approval.