Applying for a home mortgage has long been an arduous, document-heavy process. However, artificial intelligence is stepping in to remove some of the friction through automated underwriting. By using machine learning algorithms to analyze applicant data, AI underwriting tools can rapidly assess risk and determine loan eligibility. This is speeding up mortgage approvals, reducing costs, and making homeownership more accessible.

The Traditional Mortgage Underwriting Process

To understand how AI is innovating, it helps to first look at the usual mortgage application process. Approval requires extensive financial vetting by an underwriter – a professional who evaluates if applicants can responsibly manage loan repayment.

Underwriting often includes:

• Income verification through tax documents, paystubs, and bank statements
• Credit reports reviewing payment history, balances, new credit, and collections
• Asset documentation like retirement account and bank statements
• Collateral appraisal for the property’s market value if loans exceed 80% loan-to-value ratio

Additionally, underwriters manually validate information, check for inconsistencies or errors, assess existing obligations, and request clarification from applicants when necessary.

This underwriting rigor aims to mitigate the lender’s risk should the borrower default on payments. However, gathering this volume of paperwork is demanding for applicants. Submitting documents also does not guarantee approval, leading many borrowers to feel deflated when denied due to stringent requirements.

How AI Automates Parts of The Process

Automated underwriting systems are now tackling pieces of the mortgage approval workflow through machine intelligence. After borrowers complete online applications, AI systems ingest and evaluate the provided data against historical underwriting models.

Within seconds, algorithms can analyze attributes indicating income sources, assets, liabilities, credit profiles, property values, and down payment amounts. Background calculations rapidly derive metrics like loan-to-value ratios, debt-to-income levels, and credit scores. Systems weigh various risk factors in these categories based on predictive analytics.

Platforms render a tentative underwriting decision to accept/decline the application or flag it for further review. If approved, borrowers undergo fewer verification checks thanks to the AI assessment. This expedites closing timelines that otherwise average around 50 days through traditional methods.

Handling Edge Cases

AI certainly cannot replicate all facets of human underwriting at this stage. While efficient at structured, rules-based analysis of financial data, algorithms have difficulties handling nuances.

Review continues to be necessary for scenarios like borrowers with thin credit files or unique income streams. Self-employed applicants often need to walk underwriters through irregular tax documentation. Gaps in employment, previous foreclosures, and student loan complexities also prompt manual examinations best assessed by experienced professionals.

That said, automated solutions continue to expand their capabilities in dealing with edge cases. With ongoing model development and new data to learn from, the accuracy of AI underwriting steadily improves.

Impact on Lending Landscape

AI adoption in mortgage lending has tangibly transformed consumer experiences and bank operations. Applicants reap benefits like:

Reduced Wait Times: AI approvals skip traditional underwriting steps, condensing the process. Quicken Loans’ Rocket Mortgage touts closing in as little as 8 days through its automated approval system.

Fewer Upfront Documents: Instant online decisions via AI mean fewer pay stubs or bank statements to supply initially. This helps borrowers apply more easily.

Expanded Accessibility: Algorithmic assessment broadens the pool of approved applicants. Those previously missing a benchmark by a slight margin often get approved.

Lenders also gain advantages such as:

Lower Origination Costs: AI does the work of underwriter teams, reducing overhead expenses. This translates to consumer savings too via lower interest rates.

Risk Insights: As models ingest more data over time, analytics improve to support profitable lending decisions and minimize defaults.

Process Efficiency: Automation speeds internal workflows so lenders can scale operations and close loans faster.

Growth Potential: Digital-first experiences align with shifting preferences among young homebuyers. This expands market share.

Regulatory Considerations

As adoption accelerates, questions around ethics, privacy and accountability arise regarding AI fairness and explainability. In response, agencies like the CFPB outline guidance for responsible automation:

Fair Lending: Lenders must ensure underwriting algorithms do not unintentionally discriminate based on race, gender or other attributes, even if neutral data is submitted.

Data & Scoring Transparency: Systems relying on non-traditional criteria should offer visibility into what drives decisions for applicants.

Human Oversight: Reviews by staff ensure successful audits and clarify automated decision disputes.

These best practices and others permit technological innovation while prioritizing consumer protections.

The Outlook of Automated Home Lending

Already AI powers over 90% of mortgages from leading companies like Fannie Mae and Freddie Mac. Integrations into default risk assessments and property appraisals further widen the scope for intelligent process reform.

As algorithms get exposed to more niche financial situations over time, the need for manual underwriting may gradually decline. However for now, prudent lenders are taking a hybrid approach. Blending automated efficiencies with human insight lets them balance risk, compliance, and customer experience as AI continues to mature.

The impacts of automated underwriting reflect just one-way algorithmic assistants are reshaping industries. Similar machine learning applications modernizing business processes will likely only snowball from here. Though AI comes with complex considerations, when developed consciously, ethically, and for broad benefit, it has the potential to profoundly make financial services more inclusive.

About the writer: Subrao Shenoy is CEO of planetRE that hosts a variety of Generative AI Solutions for Real Estate (Aelo.AI and chocolatechips.ai). He has run a successful proptech company for over a decade with experience of automating millions of transactions across the nation. He also owns seminal patents in CRM, Property Search, and Blockchain /AI .