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Definition: Automated Underwriting
Underwriting is the process of loan approval after the careful evaluation of the property for which loan is taken. The approval also depends upon the creditworthiness of the borrower and his ability to repay the loan. Banks generally utilize CIBIL (Credit Information Bureau (India) Limited) score to check the creditworthiness of individual customers. This score is based on the loan and credit card repayments by the customer. Initially, this underwriting process was done by humans only. So, automated underwriting is the process through which this underwriting process of loan approval is done instantaneously through computer based algorithm.
The main advantage of automated underwriting includes high speed and efficiency, instant approval of loan, minimizes documentation work, low processing cost and also free from human errors. The approval of a loan depends upon following factors:
1) CIBIL score ( A score of 750 is generally considered good)
2) EMI to income ratio ( If it is more than 50%, then there are huge chances that bank may not approve the loan)
3) Company profile of where the individual work
4) Payment history trend
The time involved for the process of processing the application and decision making is reduced significantly using automated underwriting.
Desktop Underwriter and Loan Prospector are the two automated underwriting systems developed for the purpose of evaluation of mortgage loans. These are developed and used by world’s two largest mortgage lenders namely Federal National Mortgage Association (Fannie Mae) and Federal Home Loan Mortgage Corporation (Freddie Mae) respectively. These systems basically work using “artificial intelligence” and a model that assigns a quantitative risk factor to all the individual mortgage applications. Whenever an individual inputs a loan application then for the purpose of processing a credit report is also being attached. Based on this available information, automated underwriters generate a “Findings Report”, clearly indicating that whether the loan is approved or not.
This system is also very helpful for a consumer who has a very good credit, but who was denied loan sanction in the past due to lower capability of down payment. This system also helps consumers during negotiations of property shopping, since it allows applying for a loan even without identifying a property.