Definition
Automated Underwriting
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Automated underwriting refers to computer-driven systems whereby loan applications can be processed very quickly to determine a decision of approval or rejection after inputting required information.
This is most often used in smaller loans such as personal loans which is why we can sometimes see lenders promising 1-hour approval service levels.
However, when automated underwriting systems are used for home loans, the computerized process serves more to filter out applicants that would most probably have their applications denied by the bank.
This is because credit assessment, analysis, approval, and underwriting can be a long process that takes a lot of work.
By stopping applications at the first phase of loan processing, lenders would save themselves from undertaking work that would be unfruitful yet take up a lot of resources to process.
Automated systems do not approve mortgages, but instead either stops an application from going any further in the loan processing stage or allow one to go on to the next phase of credit assessment.
This is partly also because it is simply not possible at this point in time to grant instant approvals for home loans and have the underwriting done in an hour.
There are many reasons for this.
Firstly, the value used in loan processing is an indicative value provided by an appraiser and not a real concrete valuation as a result of a physical inspection. A variance between an indicative value and assessed value can have big implications to a mortgage’s loan to value.
Secondly, housing loans are considerably large loans and it would be risky to approve such loans too quickly without going through a phase of scrutiny by people.
Thirdly, there’s no guarantee that a certain borrower would accept the loan quantum suggested by the computer. Borrowers could very well take on a lesser loan amount or even find it too low to be acceptable. Committing resources to underwrite credit facilities without certainty can be a waste of resources.
Legal work can be tedious and cannot be done so quickly as well.
There’s also the potential for alternative documentation and other requirements that deviate from the standard set of loan documents. Things that automated systems are not programmed to process.
The list of reasons why fully automated underwriting systems are not used for housing loan is extensive. They are most suitable for unsecured loans in a personal or business capacity.
It’s main role is to reject cases that have little chance of approval, and allow those that meet the minimum criteria to enter the next phase of the home loan approval process.
The automated underwriting system does play a role in home loan qualification. This enables applicants to have an additional financing option available should they need it as they know that their loan would most probably be approved, provided the information they provided are truthful.
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