Underwriting is the process by which a lender evaluates the risk of a borrower, as well as their eligibility for a specific loan program.
There are multiple stages and layers of underwriting. Depending on the type of loan you’re seeking, you might need to meet a certain set of requirements. In addition, lenders can have their own guidelines borrowers must meet.
For most homebuyers, the first layer of underwriting they encounter is through an automated underwriting system. There are several types, and these computer programs basically evaluate a prospective buyer’s credit and financial profile to make a preliminary judgment about their loan file.
USDA lending utilizes an automated system known as GUS, which stands for Guaranteed Underwriting System.
Let’s take a closer look.
GUS was created to automate the process of credit risk evaluation for USDA loans, and thus speed up the approval process for USDA borrowers. It uses a scorecard system, as well as built-in rules, to automatically approve or deny an applicant’s loan for underwriting.
Specifically, GUS judges applicants based on:
- Household income
- Ratios, including Principal, Interest, Taxes and Insurance, Payment-to-Income and Debt-to-Income ratios
- Credit score and history
- Loan amount
- Property location
- Citizenship/legal status
- Cash reserves and liquid assets
USDA Application Eligibility
In order to automatically approve an application for underwriting, GUS will need to see that:
- The household income does not exceed 115 percent of the area’s median income
- Monthly housing expenses (PITI) will not exceed 29 percent of the applicant’s income
- Total debts do not exceed 41 percent of the applicant’s income
- The property being purchased is in an eligible rural area
- The applicant has a credit score of at least 640
Questions about whether you qualify?Find a USDA lender who can work with you every step of the way. →
Once GUS has evaluated an applicant, it will offer a recommendation based on their assessed risk and underwriting potential.
Types of GUS Risk Recommendations Include:
- Accept - Accept means the applicant’s credit risk is “acceptable” under USDA underwriting guidelines. It’s not an official loan approval, but it will allow the loan to move to the next step in the approval process.
- Refer - Refer means that potential risks have been identified. The case should be reviewed by a human underwriter to further assess the loan file.
- Refer with caution - This recommendation means GUS has found multiple lays of risk and that thorough evaluation by a human underwriter is required to proceed.
- Ineligible - An ineligible recommendation means the loan file doesn’t mean USDA regulations and the applicant will be unable to move forward. The property being purchased may also be located in an ineligible area.
There are three types of underwriting recommendations. These ensure the applicant and loan adhere to USDA loan regulations and that the property is located in a USDA-eligible area.
Potential recommendations include:
- Eligible - This means the loan, property and applicant meet all regulatory requirements to qualify for the USDA loan.
- Ineligible - An ineligible recommendation indicates that one or more regulatory requirements has not been met.
- Unable to determine - This recommendation typically means the property cannot be located or there are other issues with the application. GUS is unable to make an official recommendation until the errors are fixed
GUS Resubmission Policy
In the event the USDA GUS system does not approve a loan for automatic underwriting, there are other options. As long as the applicant and property are eligible under USDA regulations, they can resubmit their application for manual underwriting, allowing a human underwriter to evaluate their loan file personally and by hand.
Applicants can also request manual underwriting if:
- Their income or assets have increased or decreased
- They’ve added or removed a borrower from the application
- Their loan amount or interest rate has changed
- The property’s sales price or value has changed
- They’ve experienced some other change that would negatively impact their ability to repay the mortgage
It’s important to note that the manual underwriting has stricter requirements.
How Long Does USDA Underwriting Take?
USDA underwriting can take longer than traditional mortgage loan, as it must go through a two-party approval system. Once the lender has underwritten and approved the loan, it must also be approved by the state’s USDA office. This can add extra time to the closing process, depending on the state and other factors.
Resubmitting for manual underwriting can also add extra time to USDA loan approvals. Typically though, borrowers can expect their USDA loans to close in 60 days or less. A loan that is automatically approved for underwriting via GUS may be processed faster.