What "Refer with Caution" Really Means
When Desktop Underwriter issues a "Refer with Caution" recommendation, it's telling your lender that your loan application carries too much risk for Fannie Mae's automated approval system. This doesn't mean you can't get a mortgage. It means the easy path is closed.
Think of DU as a fast lane for loan approvals. When you get "Refer with Caution," you're being moved to the regular lane where a human underwriter must review every detail of your application manually.
Your lender faces a choice at this point. They can decline your application, or they can manually underwrite your loan using Fannie Mae's traditional guidelines found elsewhere in the Selling Guide. Manual underwriting takes longer and requires more documentation, but many borrowers still get approved this way.
Why DU Issues This Recommendation
Desktop Underwriter evaluates dozens of risk factors simultaneously. A "Refer with Caution" recommendation typically results from multiple risk factors layering together, even if each individual factor might be acceptable on its own.
Say you have a 640 credit score, a 45% debt-to-income ratio, and you're putting 5% down on a condo. Each factor alone might be manageable, but together they create a risk profile that exceeds DU's comfort zone.
The system looks for patterns in loan performance data. When it sees combinations of factors that historically led to higher default rates, it refers the loan for manual review rather than approving it automatically.
Common Risk Factors That Trigger This Response
Credit-related factors often play a major role. Recent late payments, high credit utilization, limited credit history, or a thin credit file can contribute to a "Refer with Caution" recommendation.
Income and employment issues also matter. Self-employment, variable income, recent job changes, or high debt-to-income ratios add to the risk calculation.
Property and transaction factors count too. Low down payments, cash-out refinances, investment properties, condos in declining markets, or properties with appraisal issues can tip the scales.
The key word is "layering." One risk factor rarely triggers this recommendation. It's the combination that creates problems.
What Your Lender Should Do Next
Your lender's first step should be reviewing all the data submitted to DU for accuracy. Mistakes in income calculations, incorrect debt amounts, or errors in credit reporting can skew the recommendation.
They should verify that your loan application reflects your complete financial picture. Sometimes borrowers forget to mention assets or income sources that could strengthen the application.
If corrections are needed, your lender will update the application and resubmit it to DU. You might get a different recommendation with accurate data.
The lender should also review your credit report line by line. Credit reporting errors are common, and fixing them before resubmission could change the outcome.
The Manual Underwriting Option
If DU still returns "Refer with Caution" after corrections, your lender can choose manual underwriting. This means a human underwriter will review your entire loan file using Fannie Mae's traditional guidelines.
Manual underwriting requires more documentation than DU loans. You'll need to provide detailed explanations for any credit issues, complete employment verification, and comprehensive asset documentation.
The underwriter will look for compensating factors that might offset the risk factors DU identified. Strong cash reserves, stable employment history, or conservative housing payments can help your case.
Manual underwriting takes longer than DU approval, often adding 1-2 weeks to your loan timeline. But many borrowers who get "Refer with Caution" recommendations still close successfully through this process.
Documentation You'll Need to Prepare
Start gathering comprehensive documentation immediately. You'll need complete tax returns for the past two years, not just the summary pages.
Employment verification becomes more detailed. Expect your lender to verify your job status, salary, and employment history directly with your employer, possibly multiple times during the process.
Asset documentation must be thorough. Bank statements for all accounts, investment statements, and documentation for any gift funds or down payment assistance programs.
If you have any credit issues, prepare written explanations. The underwriter wants to understand what caused late payments, collections, or other derogatory items and why those situations won't recur.
What Could Complicate Your Situation
Undisclosed debts or income sources can derail manual underwriting. The underwriter will verify everything, and surprises damage your credibility.
Recent credit inquiries or new debt can be problematic. If you've applied for credit cards or other loans since your mortgage application, disclose this immediately.
Employment changes during the loan process create complications. Job changes, even promotions, require additional documentation and can delay closing.
Property issues discovered during the manual review can also cause problems. Appraisal concerns, title issues, or property condition problems that weren't apparent initially may surface during the more detailed review.
The Bigger Picture on Risk Assessment
Fannie Mae's "Refer with Caution" recommendation reflects their assessment that your loan carries higher risk than their automated system will accept. This doesn't mean you're a bad borrower or that you won't repay the loan.
The recommendation is based on statistical models that predict loan performance across thousands of borrowers. Your individual circumstances might be stronger than the model suggests, which is why manual underwriting exists.
Understanding this helps you approach the process strategically. Focus on documenting your strengths and addressing the specific risk factors that likely triggered the recommendation.
Remember that many lenders have their own risk tolerance beyond Fannie Mae's guidelines. Some specialize in manual underwriting and may be more willing to work with "Refer with Caution" cases than others.
References
For the official guidelines, see B3-2-07: Refer with Caution Recommendations in the Fannie Mae Selling Guide.
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Original Fannie Mae Guideline Text
B3-2-07, Refer with Caution Recommendations (02/01/2023)
Overview of Refer with Caution Recommendations
Lender Response to a Refer with Caution Recommendation
Overview of Refer with Caution Recommendations
The layering and degree of risk factors that result in a Refer with Caution recommendation represent a greater risk of serious delinquency than for those loan casefiles that receive an Approve recommendation.
Any loan casefile that receives a Refer with Caution recommendation from DU does not represent a level of risk that is acceptable to Fannie Mae for DU loans. If the data DU considered was an accurate representation of the borrower’s income, assets, liabilities, and credit profile, the loan is not eligible for sale to Fannie Mae as a DU loan.
The following table provides further information about this DU recommendation.
Refer with Caution
Eligible for Fannie Mae’s limited waiver of certain mortgage eligibility and underwriting representations and warranties?
No
Satisfies Fannie Mae’s credit risk standards/assessment?
No, the loan does not meet Fannie Mae's credit risk standards for DU loans.
Satisfies Fannie Mae’s mortgage eligibility criteria?
No, the loan does not meet Fannie Mae's stated eligibility requirements for DU loans.
Eligible for sale to Fannie Mae?
Not as a DU loan.
The lender may manually underwrite the loan in accordance with this Selling Guide if the loan product or transaction otherwise allows for sale of manually underwritten loans. See
Lender Response to a Refer with Caution Recommendation
When a loan casefile receives a Refer with Caution recommendation, the lender should:
Review the DU loan data for accuracy and verify that all income, assets, and liabilities were accurately recorded and fully disclosed by the borrower.
Determine if there is any information outside of the data submitted to DU that could have affected DU's recommendation.
Update the loan application data (if applicable) and resubmit the loan casefile to DU for an updated recommendation.
Review the credit report data to determine if the information accurately represents the applicant’s credit history. Erroneous data in the credit report, or contradicting or derogatory information, could have affected DU’s recommendation. (See
B3-2-01, General Information on DU, for additional guidance.)
Investigate whether there were any extenuating circumstances that contributed to serious instances of derogatory credit.
If the loan casefile still receives a Refer with Caution recommendation, the lender may manually underwrite the loan in accordance with the requirements in the table above.
