How Can Manual Underwriting Help You Get A Mortgage?
The process to obtain a mortgage can seem simple on the surface. But behind the scenes, there are multiple moving parts. One major part is underwriting. While some of the underwriting process can be automated nowadays, it is usually still overseen by a human. Full manual underwriting still happens and can be helpful to home buyers in certain circumstances.
What Is Manual Mortgage Underwriting?
When applying for a mortgage loan, manual underwriting verifies and analyzes your finances to determine whether you meet a loan’s requirements. A human underwriter conducts the underwriting process, evaluating your mortgage application and its supporting paperwork. Today, most lenders rely on algorithms to determine mortgage approval. Manual underwriting may be the next option when an algorithm rejects an application.
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Automated Underwriting Vs. Manual Underwriting
Underwriting is when a lender evaluates your debt, assets, income and the details of the property you’re buying to determine whether they can put a stamp of approval on the mortgage. And there are two underwriting methods: automated and manual.
Automated Underwriting
Automated underwriting uses technology to analyze a borrower’s finances and decide on final loan approval. One of the chief benefits of automated underwriting is speed. An algorithm can decide on loan approval much faster than a human being. However, this underwriting method doesn’t work for all borrowers. Algorithms are suitable for borrowers with straightforward financial situations. Automated underwriting may not work for you if you’re self-employed or have past financial issues.
Manual Underwriting
Manual underwriting takes a lot of skill. An underwriter must go through your finances line by line to make sure everything is in order. While this process takes longer than automated underwriting, it can benefit certain applicants.
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When Do You Need Manual Underwriting?
Your lender may need to underwrite your loan manually if you have any of these issues:
- No credit history or debt: Your credit history summarizes how you’ve managed debt in the past. Your history of managing debt is important for lenders because it tells them how well you handle repayment. Manual underwriting can unearth an alternative credit history using items like utility or rent payments.
- Past financial problems: A low credit score or a negative event, like bankruptcy or foreclosure, will raise red flags for lenders. A human underwriter may be able to view these as isolated incidences if there are signs of improvement.
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Manual Underwriting By Mortgage Type
If you don’t meet the automated underwriting criteria for the algorithm, your lender may require a manual review of your mortgage application for your loan type.
Conventional Loans
A conventional loan is a private loan that isn’t insured by a government agency.
Conventional conforming loans meet the mortgage loan standards Fannie Mae and Freddie Mac set. The primary requirement is that they fall within the set loan limits. Conventional conforming loans typically use automated underwriting, though lenders may underwrite loans manually under certain conditions.
Non-Conforming Loans
Because non-conforming loans – such as jumbo loans – don’t meet Fannie Mae or Freddie Mac’s requirements, lenders can’t sell them to Fannie or Freddie on the secondary mortgage market. Non-conforming loans frequently require manual underwriting because they exceed Fannie and Freddie’s loan limits or don’t meet other requirements.
FHA Loans
You may qualify for a Federal Housing Administration (FHA) loan with a 580 credit score and a DTI of up to 57%. When an applicant has a credit score lower than 620 and a debt-to-income ratio (DTI) greater than 57%, the application often requires manual underwriting.
You’ll need to make a down payment of at least 3.5%, and you may also need to demonstrate FHA compensating factors to make the mortgage work, such as having enough cash reserves to cover at least three monthly mortgage payments or having residual income.
VA Loans
U.S. Department of Veterans Affairs (VA) home loans are a benefit of military service. One of the great things about VA home loans is that their requirements are often more flexible. Still, there are times when manual underwriting may be necessary, including if a borrower has recently experienced a significant financial event, like a foreclosure, bankruptcy or delinquency on federal debt. Even recent late payments or insufficient credit history may require the human touch of a manual underwriter.
USDA Loans
U.S. Department of Agriculture (USDA) loans can be a great option for borrowers moving to a rural area. They generally have more flexible credit and down payment requirements than conventional loans. Loan applications that don’t pass automated underwriting often undergo manual underwriting.
How Does The Manual Underwriting Mortgage Process Work?
Manual underwriting is a very involved process. Your underwriter will conduct an extensive review of your finances. You should prepare to answer your underwriter’s questions and submit additional paperwork to support your mortgage application.
Document Review
During manual underwriting, underwriters look at your income, assets, debt and the property you’re applying for. This review requires documentation, including:
- Up to a year of bank statements
- Multiple years of tax documents
- Retirement or brokerage account information
- Pay stubs or proof of income if you’re self-employed
- Proof of asset ownership, such as vehicles
Credit Report Review
Your lender will pull a copy of your credit report from at least one of the major credit reporting agencies. They review the report to assess your history of on-time payments for credit cards and loans, and in some cases, they may even see your rent and utility payment history.
If the underwriter discovers any inconsistencies in the report or has questions, they may request a letter of explanation. The letter can be your opportunity to add any necessary context for the underwriter.
Income Review
Your lender will also review your debt and income. Lenders will look for steady income streams. Even if you work seasonal or contract jobs, lenders want to see steady income or yearly income growth. If the underwriter notices a sudden change in income, they may ask you to explain the change.
Debt Review
Lenders will evaluate how well you manage debt. For example, if you’ve recently taken out debt to grow a business or take classes for your career, that may not count against you. A lender may also understand if your debt has increased due to an accident or emergency medical bills.
However, discretionary spending going up without an increase in income will likely raise a red flag for the underwriter. If the lender wants to know more about this, be ready to honestly and thoroughly respond to their questions.
Down Payment Review
Lenders will also look at your down payment amount and where the money for the payment is coming from. If you can save enough for a large down payment or receive down payment assistance, it may lessen any concerns about your credit.
Tips For Managing The Manual Underwriting Process
- Increase your down payment: A large down payment means you have more skin in the game, which may help ease lender concerns because it shows your ability to save.
- Reduce your debt: Reducing your debt lowers your DTI. Since DTI is one of the main components of mortgage approval, a lower percentage will help you get approved.
- Improve your credit score: A higher credit score shows lenders you can handle debt and make on-time payments. A higher credit score can increase your chances of approval and may land you a better interest rate.
- Build up your cash reserves: When a borrower has cash reserves, it shows a lender they’re ready for an emergency. If they experience a major financial setback, the lender knows they have money in the bank to cover their expenses and pay their mortgage.
The Bottom Line
If you’re in a unique or complex financial situation, manual underwriting may increase your chances of mortgage loan approval. A human underwriter can be more flexible as they consider your mortgage application through the lens of your specific circumstances.
