Automated Underwriting (AU) is not new. Developed several years ago by mortgage giants Freddie Mac and Fannie Mae, AU enables many mortgage applicants to obtain loan approval within minutes of taking an application. Back in the old days, a loan officer would take an application by hand, submit the file to a processor, and the processor would send out verification forms, obtain bank statements and pay stubs, order the credit report, appraisal, etc. Quite time consuming.

When finished, the processor submits the package to the underwriter who will pick apart the file with a fine tooth comb.

Approved yet? Probably not. Typically, the underwriter will want "conditions" prior to issuing an approval.

• A more recent bank statement
• A clarification on an employment verification
• A written explanation on a late payment from a Sears account five years ago
• An explanation as to why the applicant didn't list any automobiles owned on the application.

And so it goes … I've been in this business a long time and I think I've seen it all.

Enter Automated Underwriting. An application submitted to AU receives a much more common sense approach. Since AU is a computerized underwriting system, it evaluates the applicant's credit in conjunction with the information contained in the application, such as loan amount, property value, salary and savings. If everything looks pretty good, AU will render an "Accept" within minutes. And the only documentation typically required is two pay stubs, two months bank statements and a property appraisal. Not bad.

The only problem with AU is that it will render an "Accept" on only those files with fairly good credit, which brings me to the purpose of this column. More lenders and brokers nationwide are offering an AU application process for "sub-prime" borrowers.

The sub-prime mortgage market has been big business for years. Still, one of the obstacles that prevent these folks from home ownership has been the underwriting process. There is often a lengthy, dreaded waiting period not just for an approval, but to find out the terms of the loan.

AU for sub-prime changes all that. It's quite simple. A loan officer takes the loan application and submits the loan to an Automates Underwriting System offered by a particular wholesale lender. The AU system will then issue a disposition. In severe cases, an approval can't be obtained. But in most cases, a good loan officer will be able to find a mortgage program that will accept a sub-prime borrower.

The only difference between a sub-prime and an "A" credit AU submission is that the sub-prime applicant will not have much of a choice in terms of mortgage programs. Basically, you are free to take or leave what is offered. But there's no pins and needles waiting period.

So, for folks with impaired credit looking to buy a house, refinance, or take equity out, expect a few things if you are approved for a loan:

1. Higher than market rate and fees
2. Little (if any) choice of mortgage program
3. The possibility of a pre-payment penalty.

All in all, however, Automated Underwriting is sure to help those folks with sub-prime credit. At the very least, a lender can offer you specific terms up front, without the necessity of jumping through hoops and hopping over hurdles.

Published: December 8, 2003

Use of this article without permission is a violation of federal copyright laws.

, the president of PMC Mortgage Corporation in Alexandria, VA, is a mortgage columnist whose work has appeared in numerous consumer, real estate, and mortgage publications. Mr. Savage welcomes your questions for possible use in this column, however because of the volume of mail received, Mr. Savage cannot answer questions individually.