USDA loans, in addition to VA and FHA mortgages, are first submitted electronically through an automated underwriting system. The system used for government-backed mortgages is called the Guaranteed Underwriting System, referred to by USDA lenders as “GUS.” Borrowers can complete an online loan application or speak with a loan officer over the phone who can take down the minimum information needed in order to receive an initial approval.
Automated Underwriting and USDA Loans
GUS is an automated underwriting system and is how USDA lenders initially approve a loan. Most lenders today have an online loan origination system that allows borrowers to apply for a mortgage online. The borrowers complete the application, step by step, and then submit the loan securely to the selected lender. The lender then reviews the application to make sure it’s complete and if it is, the loan officer then electronically submits the loan file for an initial approval. It’s in this fashion that most lenders issue a loan preapproval.
GUS evaluates credit, debt ratios and other factors entered into the original loan application and then responds with—
- Refer, Caution
Upon receipt of an “Accept” the loan process moves forward. With a “Refer” it means there are some things in the file that need to be addressed before the loan can be approved. It doesn’t necessarily mean the loan is turned down but there might be an outstanding collection account that needs to be paid. A “Refer, Caution” is the next level and usually means there is something in the borrower’s profile that keeps a loan from being approved. A recent bankruptcy for example might be in the borrower’s credit report.
After the approval is issued by GUS, the loan file still must be documented. At this stage the loan is not approved but preapproved based upon the information on the application. The loan officer must still compare your documentation with what appears on the application.
For example, you can expect to provide your most recent pay check stubs. The loan officer or loan processor will verify the amounts on the check stub and the application match. If they do not, it will be corrected on the application. Other documentation such as bank statements or income tax returns will also be reviewed with corrections made. Once all documentation has been submitted the application will be run through GUS once again with the corrected data to make sure the loan still receives the “Accept” status.
When loans that first receive an initial Accept then later receive a “Refer” it’s typically because the documentation provided doesn’t match up with the initial application.
Manual Underwriting and USDA Loans
In the case of a “Refer,” a manual underwrite may be needed. Note, not all lenders manually underwrite a USDA loan but it’s allowed under USDA guidelines. A manual underwrite is how lenders used to approve loans before automated underwriting systems became the norm.
A manual approval is sometimes necessary when the borrowers have a recent bankruptcy or a short sale or even a foreclosure in the credit file. If the lender can make the case the borrowers do in fact meet USDA guidelines, the loan can still be approved. A common reason for a manual underwrite might be for someone without a credit history and there are no credit scores being reported. With a manual underwrite, the lender will document a 12-month rental history and use three alternative credit resources such as utility bills and cell phone payments.