What is manual underwriting? Everything you need to know
Mortgage lenders most often use automated underwriting powered by algorithms to quickly determine whether to approvea loan. But in some cases, a manual mortgage underwriting process is needed.
This involves a human reviewing your financial situation carefully, looking closely at different criteria that can indicate your ability to repay what you borrow.
If you’re preparing to get a mortgage loan, it’s normal to have questions about this process and manual underwriting. Exactly what is manual mortgage underwriting, and how does it work?
What is manual underwriting?
Manual underwriting of a mortgage is when a human underwriter employed by the lender personally reviews a borrower’s financial status instead of relying solely on automated software. This provides a more hands-on, detailed review of a loan application. It is often employed when a borrower doesn’t fit the typical profile that automated systems approve.
Borrowers with high debt-to-income (DTI) ratios, no credit history, or a past bankruptcy can fit this criteria.
“Manual underwriting is a more comprehensive overview, including an analysis of the financial well-being of the borrower and any possible risks that cannot able to be taken into account using automated underwriting,” explains Paul Ferrara, a senior wealth counselor at Avenue Investment Management.
Although it’s inherently more open-ended, manual underwriting is also more paperwork-heavy because the lender needs to essentially scrutinize the borrower’s finances from scratch. The need for manual underwriting shouldn’t directly impact the mortgage rate you qualify for from the lender.
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When is a manual underwriting process done?
Manual underwriting is often needed when a borrower's loan application doesn’t fit the standard mold. This can happen when you
- Lack a credit history
- Have a high DTI ratio
- Earn unusual sources of income
- Have faced recent financial challenges like foreclosure or bankruptcy.
In these instances, automated underwriting usually isn’t sufficient for loan approval.
“Let’s say you are a self-employed borrower who claims large tax deductions. That can make you look riskier to an automated system. Manual underwriting in this case can consider your actual bank cash flow and long-term stability,” notes Dennis Shirshikov, a professor of finance and economics at City University of New York/Queens College.
How does manual mortgage underwriting work?
There are several steps involved with manual underwriting of a mortgage loan. Let’s take a closer look at each of these.
Documentation collection
You, the borrower, will be asked by the lender to provide necessary documentation in the form of pay stubs, tax returns, bank statements, proof of rent and/or utility bill payments, and other financial records to substantiate your finances.
“Missing pages or unexplained deposits will prevent many underwriters from approving you, so be sure to have all your paperwork in order,” Shirshikov says.
Credit review
The human underwriter will review your credit reports and look closely at payment history, outstanding debts, and potential red flags as part of the loan process.
“Even if there is limited history in your reports, the underwriter will look for patterns of responsibility – such as on-time utility or rent payments,” says Martin Boonzaayer, CEO/founder of The Trusted Home Buyer.
Income and employment evaluation
The lender will carefully evaluate your employment history and stability, as well as earnings consistency. If you are self-employed, profit and loss statements can help substantiate matters.
“Stability is key here. Consistent work history and predictable income are strongly valued by the lender,” adds Boonzaayer.
Asset and liability assessment
Additionally, the underwriter will parse through your savings, investments, and other assets to ensure you have sufficient financial reserves.
“Having ample reserves and liquid assets can help mitigate some of the lender’s higher perceived level of risk in other areas,” Shirshikov continues.
Risk decision
After weighing all the important mortgage factors like your credit, earnings, debt, and compensating factors, the underwriter will make a final determination on loan approval.
“Having a larger down payment, low housing expenses compared to your income, and/or significant financial reserves can help offset any perceived risk,” says Boonzaayer.
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Manual underwriting versus automated underwriting
It’s a good idea to know how manual underwriting differs from automated underwriting of a mortgage loan, especially if it’s needed.
Automated underwriting
“Automated underwriting uses algorithms to quickly decide whether to approve your loan or not. The manual process, on the other hand, relies on human judgment to also assess other nontraditional factors before making the call on loan approval,” Jeff Goodman, a licensed real estate agent at Brown Harris Stevens, says. “The manual process can be a bit more time-consuming, but it is much more accommodating compared to automated systems.”
Lender automated systems offer greater speed; with mortgage approvals, it’s usually completed within minutes to a few hours. But automated underwriting may ignore details that can be identified by a manual human underwriter when more complex financial circumstances are involved.
Manual underwriting
Manual underwriting, meanwhile, can take several days to a few weeks, depending on your financial situation and the lender’s workload. But what it sacrifices in speed it makes up for in flexibility.
“It enables human judgment to evaluate context, exceptions, and other types of nuances. Manual underwriting encourages detailed documentation and narrative clarity,” says Shirshikov.
Manual underwriting process of different loan types
The process involved with manual mortgage underwriting by the lender can vary depending on the type of loan you choose, too. Let’s drill down into how and why.
Conventional loans
Conventional loan underwriting done manually is a hands-on, detailed process that evaluates income, credit score, and assets carefully, allowing exceptions for compensating factors but setting particular conditions for closing.
Because the majority of conventional loan borrowers are easily eligible via automated underwriting systems, “manual underwriting of conventional loans is less common but can be done if automated systems don’t approve,” says Boonzaayer.
Better Mortgage offers an advantage when it comes to conventional loan underwriting. That’s because it uses AI to speed up the process. Also, Better loan advisors remain in close contact with their customers in ways that make a big difference.
FHA loans
FHA manual underwriting guidelines allow for more flexible credit requirements, making FHA loans a common, more lenient fit for manual underwriting.
“FHA loans primarily focus on the ability to repay and could allow lower credit scores if you have strong compensating factors,” adds Goodman. Case in point: You can qualify for an FHA loan with a 3.5% down payment with a minimum 580 credit score; you’ll need to put down at least 10% if you have a credit score between 500 and 579.
VA loans
These loans, which only veterans, active-duty military members, and certain surviving spouses can qualify for, are eligible for manual underwriting when the borrower doesn’t meet automated system criteria. This involves a thorough review of income, DTI ratio, credit history, and the VA’s required residual income calculation to make sure sufficient funds are in place for living expenses.
The human underwriter can also take into account compensating factors like military benefits, down payment, and savings, and could require additional documentation such as letters of explanation or proof of unusual financial situations.
USDA loans
Designed for buyers who agreed to purchase a home in a designated rural area, USDA mortgages allow for manual underwriting when needed, including in cases with nontraditional credit. As with other loan types, the underwriter will scrutinize your credit history, DTI ratio, job stability, compensating factors, and earnings – ensuring that you don’t exceed strict USDA income limits.
The experts note that manual underwriting is quite common with this financing choice.
How to increase manual underwriting approval chances
Worried that manual underwriting will be required for your financing, or concerned about passing muster with the manual underwriter already assigned to your loan? Here are recommended tips from the pros that can improve your chances of loan approval when manual underwriting is needed:
— Reduce outstanding debt. “Work on paying down any revolving debt, including credit card bills, to decrease credit utilization prior to applying for your loan,” suggests Shirshikov.
— Boost your credit score. By decreasing outstanding debt, paying your bills punctually, keeping credit card balances low, not opening any new accounts or closing any existing ones, and regularly checking your credit report for inaccuracies and errors, you can improve your score over time.
— Provide organized documentation. “Give the underwriter exactly what they ask for, and keep your paperwork and documentation well organized, as underwriters appreciate a straightforward picture of financial stability,” advises Goodman.
— Increase your down payment. “Make as large a down payment as you can possibly afford,” says Boonzaayer.
— Maintain steady employment and income. Switching jobs, enduring a pay cut, or getting laid off or fired can ruin your chances.
— Explain your circumstances. If your financial status or credit reports are less than desirable, provide a letter to the lender that explains special circumstances or hardships.
Ultimately, the underwriter, whether human or automated, has the same goal: To make sure borrowers can afford their mortgage payments and repay the mortgage loan as agreed.
Conclusion
Manual underwriting is a godsend when automation would otherwise reject your loan approval. Although underwriting manually could take a bit longer, it enables the lender to make better-grounded decisions and consider your entire financial picture, thanks to the documentation and substantiation you can provide.
“Manual underwriting can open the door for borrowers who do not fit in the automated box,” Shirshikov says. “It’s the last bastion of the old-fashioned way of lending – an opportunity to apply a name and face to a unique story rather than just data in a row.”
Whether your loan requires manual mortgage underwriting or automated underwriting, Better’s innovative technology can help this process move along more quickly and smoothly.
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