What is automated underwriting?

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Automated underwriting systems are software applications designed to evaluate electronically submitted loan applications for qualification, eligibility or approval decisions.

In combination with the web and online commerce, automated loan or credit underwriting has revolutionized how many consumers now shop and obtain various types of financing, from car loans and credit cards to home equity credit lines to personal loans.

The system’s decision is based on the guidelines and decision rules programmed into the underwriting system. Depending on the lender or program, the automated underwriting system may be used to determine loan qualifications, eligibility or actual approval.

Most consumers encounter automated underwriting systems, or “AUS,” through the websites of direct lenders. The online system collects and reviews relevant information about potential borrowers, such as income, employment history, assets, credit history, credit scores and public records, before rendering a decision.

By contrast, manual underwriting is the process in which an individual reviews a loan application manually to verify that the borrower meets the loan criteria. This traditional method of loan and credit underwriting often meant that it could take days, sometimes weeks, to determine loan program eligibility.

Many automated underwriting systems used by direct lenders can issue a loan decision within minutes of receiving a completed loan application, sometimes as fast as a few seconds. Depending on the lender, the system can also process and issue loan decisions at any time of the day or night, providing convenient options for more consumers.

When a potential borrower visits a direct online lender’s website with an integrated automated underwriting system, and the first step is to complete an electronic loan application. Once completed, the application data is sent to the automated underwriting system. The system immediately evaluates important loan decision data, such as credit, income, employment, and bank account balances, among other indicators.

Automated loan underwriting process

Automated underwriting approval sometimes requires additional documentation from the borrower that the creditor needs to verify, but approval can be issued without any further action from the borrower.

For example, an automated approval for a payday or cash advance loan may require no additional documentation from the applicant before the lender finalizes the loan approval and issues the funds – although the lender may verify some information directly, such as the applicant’s current employment.

Some automated underwriting systems do require further documentation, such as physical proof of income in the form of a paycheck stub or bank statements showing regular deposits. In this form of automated underwriting, the loan is not fully approved until the lender reviews and affirms that the required documentation is satisfactory and the final analysis confirms the applicant’s eligibility for the loan.

When a loan application is rejected by an automated underwriting system, the applicant is typically provided with a list of reasons why the application was denied. This gives the applicant a path to follow to be approved for a loan in the future. If the applicant corrects the problems keeping him or her from obtaining the loan, the automated underwriting system may reevaluate and approve the application at a later date.

Automated loan underwriting has other advantages besides speed: it evaluates loan applications based on a predetermined set of parameters. By minimizing the need for manual underwriting, automated underwriting systems minimize the chances of human bias when it comes to evaluating a loan request. Although some lenders do create their own proprietary underwriting systems from the ground up, some lenders do opt to use publicly available “off the shelf” automated underwriting systems to handle loan approvals.

Disclaimer: NetCredit is a direct personal loan provider and does not provide financial advice, nor does it vouch for any vendor or service mentioned on our NetCredit personal finance blog or online consumer loan glossary. Always research and perform due diligence on any service provider or vendor before deciding to use them, and we recommend that you speak with a financial advisor regarding all decisions that will affect your finances.

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