When applying for a mortgage, lenders typically use one of two methods for underwriting: automatic or manual. Manual underwriting often offers higher acceptance rates for applicants with complex financial situations, such as self-employment or nontraditional income. Learn what manual underwriting for a mortgage is, how it works and what to expect throughout the process.
Manual underwriting is the process by which a lender evaluates whether you have the financial means to repay the loan you are applying for. Often, computer programs decide whether you are eligible for a mortgage.
However, some borrowers need a human evaluation to decide whether they can repay the funds. This can be the case if they are self-employed and seeking a Federal Housing Administration (FHA) or jumbo loan.
A loan professional reviews the data and information you submit with your loan application. This requires additional time compared to automatic underwriting, and you’ll also need to submit more documentation than you would with automatic underwriting. However, you’ll also stand a better chance of receiving a loan approval if you go through manual underwriting when you have unique financial circumstances.
The lender decides whether to process your mortgage application through automatic or manual underwriting based on questions from the mortgage application. When you don’t meet certain standards as a borrower, the lender flags your account for manual underwriting.
Lenders use manual underwriting in a variety of circumstances. Those can include any of the following.
Some individuals prefer to live debt-free, perhaps always purchasing cars with cash and avoiding credit cards. Without owning a home, their credit file may be thin. Although you’re well established financially, you don’t have proof that you know how to handle debt.
It doesn’t necessarily mean you have poor credit, it just means you have limited credit history, which can be a red flag for lenders. In that case, the lender will manually review your file to see whether you can repay the requested loan.
Your debt-to-income ratio (DTI) is an indicator for lenders of how successful you’ll likely be in repaying your mortgage. When that ratio is too high, it signals that you’ll struggle to make on-time payments. Government regulators monitor this ratio to mitigate risks of bankruptcy or foreclosure.
Manual underwriting allows you to show that this ratio is high temporarily or related to a business you own. Showing creditworthiness can also approve some instances of a high DTI.
Past financial woes can lead to a negative credit history. A history of missed credit card payments, loan defaults, or financial mismanagement could lead to automatic rejection during computer evaluation. But manual underwriting can review your file and decide whether that was an isolated instance or far enough in your past to where you’ve rebuilt your financial reputation since then.
A history of bankruptcy or home foreclosure can complicate automatic mortgage approval. That does not mean it is impossible to do so, but it will make the process more complex. Showing that you have the savings for the down payment can aid in the manual underwriting process and demonstrate that you are now financially sound to take on the loan.
Learn the process for undergoing manual underwriting during a mortgage loan application.
Your lender will request a variety of documents that help them verify your income and finances. These will likely include the following.
During this phase of the process, be as responsive as you can be to document requests to ensure your loan moves along smoothly through the process. Assembling these materials in advance will help you stay prepared for anything your lender requests.
The next phase is when the underwriting team will review what you’ve submitted and what is available to them through other sources. Here’s what your underwriter will be looking at.
After assessing your credit report, finances, income, debt, and collateral, the lender will make its decision. At this point, the underwriter might approve the loan or deny it. In some cases, the lender will suspend the loan with contingencies. That means that you must provide further documentation before the lender can issue the loan officially but it is not a bad sign so long as you work quickly to provide additional documentation.
Review the various types of loans and how manual underwriting works to help you get the mortgage you want to purchase your home.
Conventional loans often employ automated underwriting as lenders frequently sell these loans to entities like Fannie Mae and Freddie Mac, known for their stringent criteria. Selling the mortgage helps the lender with cash flow to continue offering loans to additional applicants. So while Fannie Mae and Freddie Mac use an automated system for reviewing your application, the lender can trigger a manual review if they believe one is warranted.
Based on the 2020 update to FHA loans, an applicant with a credit score below 620 or DTI greater than 43% must use manual underwriting. While you can still get an FHA loan with a credit score as low as 580 and a DTI of 50%, you might still need to provide additional documentation for manual underwriting to gain access to a mortgage loan. Increasing your down payment to more than 3.5% can also ensure your loan application is approved.
Receiving a denial for a USDA loan is not uncommon but you can request manual underwriting for your application within the automated system. This can increase your chances of receiving an approval.
Lenders aim to approve as many VA loans as possible because these loans are designed to show appreciation for service members' sacrifices to protect our country. However, to approve veterans and their families for loans, most must go through manual underwriting. During the process, your underwriter will look at your DTI and check for derogatory marks on your credit.
This is a type of nonconforming loan, giving lenders more flexibility with these loans. Most lenders still automate this underwriting process for the average home. But lenders also see a great deal of high-value jumbo loans. Home loans over $2.5 million often require manual underwriting regardless of the applicant’s financial details.
While technology has made the mortgage approval process faster and often simpler, human underwriters are still involved. Learn how manual and automated underwriting differs.
With automated underwriting, your lender will use a computer algorithm to determine your eligibility for the loan. The algorithm assesses all application data and credit report details, obtained automatically upon entering your Social Security number and other personal information. Your data must meet the lender’s standards to receive approval.
The computer pulls in all relevant financial data, including your income, debt, credit score, credit history, etc. It will check across various data points to see whether you are a good match for the lender and the mortgage value you are applying for.
In contrast, manual underwriting simply uses technology to communicate and gather relevant data. Then, a human will review that information. It requires more documentation because it doesn’t pull from the relevant databases since your financial situation is likely unique. This helps improve the chances of getting approval for those with nontraditional income or higher debt-to-income ratios due to things like rental properties.
The underwriting process takes place after preapproval. It’s wise to go through preapproval before shopping for a home to show you are a worthy buyer. But you can also complete the full underwriting process before placing an offer on a home to show that you have done all the relevant work to complete the mortgage process and win the house.
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Manual underwriting offers a path toward mortgage approval for those who could not otherwise get a mortgage using the automated processes. Whether you’re self-employed, manage rental properties or have a complex credit history due to hardships, having an underwriter review your finances can be the best way to get into the home you’ve always wanted.
Manual underwriting is more expensive for the lender because they have to pay for the underwriter’s time to review your finances. But it is not more expensive for the borrower.
A mortgage lender uses an underwriting team to do manual underwriting. Most lenders offer this as an option based on the details you input during your application.
You can get manual underwriting by completing a mortgage application and inputting certain details, such as being self-employed or having a nontraditional income. The algorithm will then know that your application needs a manual review.