What Is Manual Underwriting and How Does It Work?

Around 16% of U.S. citizens have no credit score, which can complicate their loan approval. Manual underwriting helps these individuals by reviewing their financial information without automated systems.

This process can be a lifeline for many. For instance, about 26% of self-employed individuals face challenges with traditional loan approvals.

Approximately 60% of loans that start with a manual review eventually get approved. This flexibility opens doors for borrowers who might otherwise be left out.

Moreover, 30% of borrowers face credit scores or income documentation challenges. Learn how manual underwriting works as you shop for lenders.

What Is Manual Underwriting for a Mortgage?

 Manual underwriting is a process where a human underwriter examines and evaluates your loan application. In contrast to automated underwriting approvals that depend on preset criteria and algorithms, manual underwriting enables a more flexible and customized evaluation.

Underwriters also check your credit history, previous employment details, and overall capacity to repay the loan. In addition to credit ratings and debt-to-income ratios, they consider non-traditional income sources and mitigating situations that might not fit properly into automated models.

How Does the Manual Underwriting Process Work?

If your application is rejected due to the strict standards of computerized underwriting,  a no-score loan with manual underwriting can be beneficial.

Here’s a brief overview of what you can anticipate during the process:

• Comprehensive Document Submission: You’ll have to submit financial documents such as bank statements, tax returns, pay stubs, and investment account statements. Be prepared to provide proof of employment, income sources, etc.

• In-depth review: The underwriter will review your documents, credit report, and overall financial profile. They will scrutinize your payment history, outstanding debts, income stability, and ability to pay the new mortgage payments.

• Open communication: The underwriter may contact you to ask for more information and double-check everything about your loan application. 

• Final decision: After a thorough evaluation, the underwriter will determine your loan application. Your loan application can be approved, denied, or put on hold (conditionally approved) if you need to provide more information.

Why Is Manual Underwriting Important?

Here are some common reasons why manual underwriting becomes important:

Credit History or Debt

For borrowers with limited or no credit history, no-score loan manual underwriting allows them to showcase their ability to manage debt responsibly. Manual underwriters can consider alternative forms of credit, such as rental payments or utility bills, to evaluate their creditworthiness.

Clean Financial History

Despite past financial challenges, such as bankruptcy or foreclosure, manual underwriting allows for a more nuanced assessment. If an applicant has demonstrated recent financial progress and stability, an underwriter may view these past events as isolated incidents rather than disqualifying factors.

High Debt-To-Income

Automated underwriting mortgage systems often have strict debt-to-income ratio thresholds, which can be a barrier for some borrowers. Manual underwriting offers flexibility, particularly for programs like FHA loans, where underwriters can consider higher debt-to-income ratios if the overall financial profile appears strong. 

There is a cap of 43% on the DTI for conforming loans. Through the manual underwriting process, FHA manual underwriting guidelines may allow you to qualify for a greater DTI of up to 50%.

Self-employment or Seasonal Earnings

Individuals with self-employment income may struggle to meet the income documentation requirements of automated underwriting systems. Manual underwriting enables underwriters to evaluate these non-traditional income sources more comprehensively, considering factors such as business longevity and overall financial stability.

What Do Underwriters Seek During Manual Underwriting?

During manual underwriting, the manual underwriter needs to get a complete picture of your finances. Here’s what they typically want to see:

1. Proof of Income: The underwriter will ask for recent pay stubs, usually from the last few months. If you’re self-employed or own a business, they’ll need profit and loss statements to verify your income.
2. Bank Statements: You may have to provide up to 12 months of bank statements. These statements show the underwriter your money management skills, such as how much you save and spend.
3. Tax Returns: You’ll likely need to supply a few years’ worth of tax returns. This gives the underwriter a longer-term view of your income and financial situation.
4. Job History: The underwriter may ask for details of your work history. This helps them confirm your employment status and your stay there.
5. Asset Information: Be prepared to share details on your assets, such as homes, cars, investment accounts, or retirement funds. This will show what you’re worth.
6. Credit Report: The underwriter will thoroughly review your credit report to access your credit history, reviewing your payment history and any past discrepancies.

Differences Between Manual Underwriting and Automated Underwriting

Here are some differences between automated underwriting vs. manual underwriting: 

Feature	Manual Underwriting	Automated Underwriting
Speed	Slow – Requires human review of documents and financial history	Fast – Decisions made quickly based on algorithms
Flexibility	High – Can consider unique circumstances and non-traditional income	Low – Relies on pre-defined rules and may struggle with complex situations
Accuracy	Prone to human error	Consistent – Follows set rules
Transparency	The borrower may receive a detailed explanation for the denial	Only limited explanations are provided for decisions
Suitability	Ideal for complex situations, self-employed borrowers, or those with limited credit history	Best for standard applications with a clear financial picture

How Can I Improve My Chances of Approval?

• Make a high down payment: A substantial down payment demonstrates your financial commitment and can alleviate lenders’ concerns. By saving diligently and allocating a larger portion of your assets as a down payment, you showcase your ability to responsibly manage your finances and build equity in the property from the outset.
• Cut back on debt: Reducing your overall debt burden is crucial during the underwriting process. A lower debt-to-income ratio improves your financial profile and indicates your ability to manage the added responsibility of a mortgage payment comfortably. Consider paying down credit card balances, consolidating loans, or negotiating more favorable terms with creditors.
• Build a good credit score: A strong credit score is a powerful indicator of your creditworthiness and financial discipline. By consistently making timely payments, maintaining low credit utilization, and addressing any derogatory items on your credit report, you can improve your credit score and increase your chances of approval during the manual underwriting process.
• Stack up cash reserves: Lenders appreciate borrowers with a financial cushion to weather unexpected expenses or income disruptions. Building up substantial cash reserves in your savings or investment accounts demonstrates your preparedness for emergencies and commitment to maintaining a stable financial footing, even in challenging circumstances.

Bottom Line

While manual underwriting offers greater flexibility to consider unique situations and non-traditional income sources, it is a more thorough and time-consuming process compared to automated mortgage underwriting. However, it provides a valuable path to homeownership for borrowers whose financial profiles may have been rejected by strict automated systems.

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