What Is a Manual Underwriting for a Mortgage?

Manual underwriting is the process where a lender assesses an applicant's financial ability to repay a loan

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.

What Is Manual Underwriting?

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.

How Does Manual Underwriting Work?

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.

When Do Lenders Use Manual Underwriting?

Lenders use manual underwriting in a variety of circumstances. Those can include any of the following.

Thin Credit File

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.

High Debt-to-Income Ratio (DTI)

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.

Negative Credit History

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.

Bankruptcy or Foreclosure

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.

What Happens During the Manual Underwriting Process?

Learn the process for undergoing manual underwriting during a mortgage loan application.

Gather Financial Documents

Your lender will request a variety of documents that help them verify your income and finances. These will likely include the following.

• Bank statements (going back up to 12 months)
• Investment account statements, if applicable
• Pay stubs
• Proof of employment
• Proof of assets, such as other property and vehicles
• Profit and loss statements if you are self employed or a business owner
• Tax returns for the previous few years

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.

Review of Your Financial Information

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.

• Credit Report: The lender wants to see how you handle debt. Your credit report will contain details about loans, lines of credit, and other financial accounts you own. It also contains details about late payments or defaults on your credit record. The lender wants to see a consistent credit history with on-time payments. Applicants with a thin credit history must provide further documentation, such as proof of on-time utility and rent payments.
• Income and Assets: Lenders like to know that you have assets to pay for your mortgage. They’ll look at your income, additional assets, how long you’ve been employed in the same place and your liquid assets to pay closing costs. The more steady your employment, the less likely lenders believe you will be to fail to make a payment. The lender might request access to additional information, such as retirement account balances or statements for rental property income.
• Debt and Liabilities: Now that your lender knows you have adequate income and assets to cover your loan, it wants to know that those funds and assets aren’t committed elsewhere to other loans. It uses your debt-to-income ratio here to ensure you have the funds to cover all monthly expenses you’re already committed to in addition to your new mortgage. Your debt and liabilities will tell the lender how much money you have to pay monthly bills to avoid giving money to borrowers who are already overstretched.
• Collateral: The final piece of reviewing your assets is to look at your collateral. This is the property value you’re purchasing and the amount you use as a down payment. The ability to include a full 20% down payment will help the lender know that if you default on the loan, they won’t lose money in the process. Regardless, you’ll need a minimum of 3% of the property value to pay as the down payment. Your underwriter will review your account balances to see whether you have adequate funds to cover the down payment. A home appraisal for the property you are buying will also tell the lender whether the property is worth the amount you’re borrowing. If the appraisal returns significantly lower than the price you offered the seller, you might need to adjust your offer to align with the appraisal value.

Final Decision

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.

How Manual Underwriting Works for Your Mortgage

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

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.

FHA Loans 

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.

USDA Loans 

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.

VA Loans

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.

Jumbo Loans

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.

Manual Underwriting vs. Automated Underwriting

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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Gaining Mortgage Approval When You Have Complex Finances

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.

Frequently Asked Questions