Manual Underwriting: Things You Need to Know

To get approved for a mortgage, you need to satisfy certain conditions about your credit, income, and the sum of money you put down. However, being accepted for a mortgage could be challenging if you have derogatory entries on your credit report, a limited credit history, or a complicated financial position.

The good news is that it is feasible to obtain acceptance by utilizing a method that is known as manual underwriting. Instead of employing an automated underwriting system, a human loan officer will analyze your application. In order to evaluate whether or not you are eligible to receive a loan, it is necessary to perform an in-depth analysis of your current financial situation.

What is Manual Underwriting?

When an application for a mortgage is subjected to manual underwriting, the application is evaluated by a human underwriter rather than an automated method, such as a piece of software or a computer. 

An underwriter will consider the debtor’s assets, liabilities, income, and job status, as well as their debt-to-income and loan-to-value ratios, credit scores, and credit histories.

In most cases, manual underwriting is employed when an application has a high probability of being declined by an automated system, or when the debtor has some exceptional circumstances but otherwise qualifies for the loan.

When an application is declined by an automated system, a creditor has the option of turning to manual underwriting in order to qualify a debtor. Manual underwriting may be the only option for debtors who have blemishes on their credit history, a high number of monthly debt payments, little money saved, or unexpected financial circumstances.

If the debtor does not match the criteria for a certain form of mortgage, the loan must go through the manual underwriting process. 

For example, if a debtor’s credit score is 620 or below and their debt-to-income ratio is 43 percent or higher, then the FHA loan the debtor is applying for must undergo manual underwriting. It’s possible that these types of debtors can still receive financing by going through the manual underwriting process.

How Does Manual Underwriting Work?

When automatic underwriting is likely to deny your application, you may want to consider the slower but more human-centric procedure of manual underwriting.

Manual underwriting involves a human underwriter looking over your loan application paperwork and making a decision about your loan eligibility based on their assessment of the risk you present to the creditor.

When automated underwriting’s strict rules are likely to result in a denial, such as when an applicant has a high income and assets but a low credit score, a human underwriter’s more accommodating approach may be beneficial.

You may be subject to manual underwriting by your creditor for the following reasons:

• Limited credit history. This can occur if you are either new to the credit system or have no outstanding debts due to a lack of credit history.

• Heavy financial obligation in relation to available resources. Lenders may be hesitant to provide you with more monthly payment obligations if your current monthly payments exceed 36% of your gross monthly income.

• Disadvantageous credit history. Lenders may view a pattern of late or skipped payments as a warning sign. Manual underwriting provides creditors with the opportunity to investigate whether or not your overdue payments resulted from exceptional circumstances.

• Insolvency and/or repossession. If you have filed for bankruptcy or foreclosure during the past few years, an automated underwriting software may reject your application. However, human underwriters will take into account your creditworthiness when reviewing your loan application.

Manual Underwriting vs. Automated Underwriting: What’s the Difference?

You can get pre-approved for a mortgage using either a manual underwriting procedure or an automated underwriting method. Automated underwriting, in which a computer program evaluates your income, debt, and credit history, is different from the manual underwriting process.

Manual underwriting can vary from automated underwriting in the following ways:

Approval Timeline

The procedure of manual underwriting can be more time-consuming and cumbersome than that of automated underwriting. In order to determine your eligibility, it may take some time for a manual underwriter to review your paperwork.

Legal Paperwork Necessary

For manual underwriting, you will need to provide supporting documentation for the underwriter to use in assessing your finances.

The paperwork you’ll need to give for manual underwriting is similar to what you’d require for automated underwriting, with the addition of a few items. Even if you have a low credit score, these documents will prove that you have the financial wherewithal to repay a home mortgage.

Here is a general summary of things you may expect from a loan, while individual creditors and loans may have different specifications.

• Your credit history and score might be checked, as might your payment history with non-bank creditors like the providers of your utility, mobile, and housing costs.

• Examination of your most recent two years’ worth of tax returns.

• Income verification documents covering the previous 30 days and a letter from your employer vouching for your employment status for the previous two years.

• Examination of tax returns and other financial records to corroborate self-employed individuals’ claims of business income.

• The examination of tax returns demonstrating rental revenue.

• Documentation from your financial institution proving you have sufficient funds.

Less Competitive Deal

Any advantage you can give your application in a seller’s market will help you snag it above other bids. As a result of the time and effort required for manual underwriting, you may find yourself at a disadvantage when competing with purchasers who can receive speedier underwriting or make a cash offer.

What are the Requirements for Manual Underwriting?

Documentation requirements for manual underwriting are typically higher than those for automated underwriting. When you submit your application for manual underwriting, you should anticipate being required to present the following documents:

• Your report on your credit standing
• Your income documented on multiple years’ worth of tax returns
• Paycheck stubs
• Your financial documents, such as bank and investment account statements
• If you are self-employed, you will need business documentation

You must be able to show that you can and will return this loan without any problems, even if your financial documents contain some degree of doubt. However, because each loan is unique, your experience with the underwriting process could be extremely different depending on the kind of loan you desire and the creditor you work with.

Research several mortgage firms and find out what they can give you in terms of the underwriting process. In addition, prior to the underwriting phase of the process, you should consult with your loan officer or processor to decide the kind of documentation that will be most helpful in establishing your eligibility for a loan and so speeding up the process.

When Is Manual Underwriting Done?

In some cases, a creditor may opt to perform a manual underwriting review of a loan application.

• You’ve finally reached the point of being debt-free. An excellent credit rating begins with a history of responsible debt repayment. However, the debtor’s FICO® score may take a hit if they want to avoid taking on any new debt. 
  
  This does not indicate a poor credit history, but rather an absence of any credit history at all. Your repayment capacity will need to be evaluated on an individual basis by your creditor if this is the case.

• You’ve only started establishing credit. Time spent establishing credit can be frustratingly lengthy. Borrowers who are young adults may not have established credit histories. Your loan application may undergo traditional underwriting procedures.

• It’s no secret that you’ve struggled financially in the past. You may think it’s impossible to buy a property after having experienced bankruptcy or foreclosure, but it’s actually quite possible. 
  
  If the debtor has sufficient assets and a sizable down payment, the mortgage creditor may be willing to extend credit despite the debtor’s poor credit score. Unfortunately, clearance for this needs a human underwriting process.

• You have a dangerously high DTI (debt-to-income ratio). Financial institutions and government regulators establish maximums on debt-to-income ratios and credit scores to improve debtors’ chances of repaying their loans. 
  
  It is possible to prove your creditworthiness during manual underwriting even if your DTI is excessively high if you can establish that it is only transitory or an expected element of your business activities.

How Long Does Underwriting Take?

Lenders typically require a total of 52 days to process a mortgage closing (from the time the application is received to the time the funds are transferred from your account to the creditor’s).

The turnaround time for conventional loans was 51 days, which was the quickest of the three types of loans studied, followed by the FHA loan at 55 days and the VA loan at 57 days.

Most of the time spent leading up to closing is spent on the creditor’s due diligence to make sure they’re not taking on an unreasonably high risk with your loan and that you are who you say you are financially. While underwriting, you’ll be doing a lot of this job. The underwriter may run into problems, which could cause your closure to be delayed.

What is the average time frame for this action? The time it takes to get through underwriting and finally close on a loan might vary from a few days to a few weeks.

The time it takes for you to get a loan relies on a variety of factors, such as the creditor’s present workload, the creditor’s underwriting standards and procedures, and the intricacy of your individual financial circumstances.

It could take a little longer than usual if the applicant has a more intricate financial history, such as a self-employed debtor.

Bottom Line

Manual underwriting is when a real underwriter looks over your finances and makes a determination on whether or not you are qualified for a mortgage. When compared to automated underwriting, manual underwriting not only needs additional documentation but also takes significantly more time.

Your insurance company will want financial records and tax filings. Before deciding whether to grant you approval or refuse it, they will examine your credit report in addition to your salary, assets, debt, and liabilities.

If you have no credit history or a significant event that occurred in your financial history, or if you are seeking a jumbo loan, your creditor will choose manual underwriting as the underwriting method for your loan automatically. Depending on the creditor that you work with, you might also have the option to request manual underwriting.

In the event that you have already been preapproved for a mortgage, the next procedure is to speak with your mortgage creditor about the process of ordering a house appraisal.