How Manual Underwriting Works

Manual underwriting is a manual process (as opposed to an automated process) of evaluating your ability to repay a loan. Your lender will assign an Underwriter to review your application, including documents that support your ability to repay (such as bank statements, pay stubs, and more).  If the underwriter determines that you can afford to repay the loan, you will be approved.

Why You Might Need Manual Underwriting

Most home loans are approved by a computer: if you meet certain criteria, the loan will be approved.  For example, lenders are looking for credit scores above a certain level.  If your score is too low, you’ll be declined.  Likewise, lenders typically want to see debt-to-income ratios lower than 31/43.  However, “income” may be hard to define, and your lender might not be able to count all your income.

Computerized models are designed to work with most borrowers and the loan programs they most often use. These Automated Underwriting Systems (AUS) make it easier for lenders to process numerous loans while ensuring the loans meet guidelines for investors and regulators.

For example: FNMA and FHA loans (among others) require that mortgages fit a particular profile, and most people fit clearly in or outside of the box.

Also, lenders might have their own set of guidelines (or “overlays”) that are more restrictive than FHA requirements. If all goes well, the computer will give an approval (“Approve/Eligible”).  But if anything is amiss, your loan will receive a “Refer” (“Refer/Caution”) recommendation, and it will have to be reviewed outside of the AUS.

Debt-free lifestyle

The key to good credit scores is a history of borrowing and repaying loans. But some people choose to live without debt which can be simpler and less-expensive. Unfortunately, your credit will eventually evaporate along with your interest costs. It’s not that you have poor credit – you have no credit at all (good or bad). Still, it’s possible to get a loan with no FICO score if you go through manual underwriting.  In fact, having no credit can be better than having negative items like bankruptcy in your credit reports.

New to credit

Building credit takes several years. If you’re still in that process, you may have to choose between waiting to buy your home and manual underwriting.  With a home loan in your credit reports, you may accelerate the process of building credit because you will be adding to the mix of loans in your credit file.

Recent financial problems

Getting a loan after bankruptcy or foreclosure isn’t out of the question. Under certain HUD programs, you can get approved within a year or two – without manual underwriting. However, manual underwriting provides even more options to borrow, especially if your financial difficulties were relatively recent (but you’re back on your feet). Getting a Conventional loan with a credit score below 640 (or even higher than that) is difficult, but manual underwriting might make it possible.

Low debt-to-income ratios

It’s wise to keep your spending low relative to your income, but there are some cases when a higher debt to income ratio makes sense.  With manual underwriting, you can obtain a larger loan – which often means you have more options available in local housing markets.  Just beware of stretching too much and buying an expensive property that will leave you “house poor”.

History of payments

Can you show that you’ve been making other payments on-time over the past year? Credit reports look at your payment history (among other things), and you will need to show the same payment behavior using various sources. Larger payments like rent and other housing payments are best, but utilities, memberships, and insurance premiums can also be helpful. Ideally, you will identify at least four payments that you’ve been making on-time for at least 12 months.

Healthy down payment

A down payment reduces your lender’s risk.  It shows that you have skin in the game, and it gives the lender a buffer if they need to take your home in foreclosure and they’re less likely to lose money when you make a larger down payment.  The more you put down the better, and 20% is often considered a good down payment (although you may be able to do less).  With less than 20%, you may also have to pay monthly private mortgage insurance (PMI), which will increase your total housing payment and makes things more challenging for you and your lender.

Debt to income ratios

Approval is always easier with low ratios. That said, manual underwriting can be used to get approval with higher ratios – possibly as high as 40/50, depending on your credit and other factors.

Government loan programs

your chances of approval are best with government loan programs.  For example, FHA, VA, and USDA loans are less risky for lenders.  Remember that not all lenders do manual underwriting, so you may need to shop around for a lender that does – and that works with the specific government program you’re looking at.  If you get a “no”, there may be somebody else out there.

Cash reserves

You will probably need to put down a substantial amount as a down payment, but it’s wise to have extra reserves on hand – and reserves can help you get approved.  Lenders want to be comfortable that you can absorb minor surprises like a failing hot water heater or unexpected medical expense.

Compensating Factors

“Compensating factors” make your application more attractive, and they might be required. These are specific guidelines defined by lenders or loan programs, and each one you meet makes it easier to get approved.  The tips above should work in your favor, and specifics for FHA manual underwriting are listed below depending on your credit score and debt-to-income ratios, you might need to satisfy one or more of these requirements for FHA approval.

• Reserves: Liquid assets that will cover your mortgage payments for at least three months.  If you’re buying a larger property (three to four units), you’ll need enough for six months.  ​Money you receive as a gift or loan cannot be counted as reserves. 
• Experience: Your payment (if approved) cannot exceed your current housing expense by the lesser of 5 percent of $100. The goal is to avoid dramatic increases (“payment shock”) or a monthly payment that you’re not accustomed to. 
• No discretionary debt: If you pay off all your credit cards in full, you’re not really in debt – but you have the opportunity to rack up debt if you wanted to.  Unfortunately, a completely debt-free lifestyle does not help you here.
• Additional income: In some cases, automated underwriting cannot count overtime, seasonal earnings, and other items as part of your income.  However, with manual underwriting, you might be able to show a higher income (as long as you can document the income and can expect it to continue). 
• Other factors: Depending on your loan, other factors might be helpful.  In general, the idea is to show that the loan will not be a burden and you can afford to repay.  Stability in your job never hurts, and more reserves than required can also make a difference.

Lots of paperwork

Getting a mortgage always requires documentation.  Manual underwriting requires even more.  Expect to dig up every imaginable financial document and keep copies of everything you submit (in case you need to re-submit it). You’ll need the usual paystubs and bank statements, but you may also need to write or provide letters that explain your situation and help your underwriter verify the facts.

Homebuying process

If you’re making an offer, build in plenty of time for underwriting before closing. Include a financing contingency so that you can get your earnest money deposit back if your application is declined (talk with your real estate agent to understand the options).  In especially hot markets, you may be less attractive as a buyer if you’re using manual underwriting.

Explore alternatives

If manual underwriting does not work for you, there may be other ways to purchase a home. 

Hard money lenders might be a temporary solution while you’re building credit or waiting for negative items to fall off your credit report. 

A private lender, co-borrower, or co-signer (when chosen responsibly) might also be an option.

Finally, you may determine that it just makes more sense to rent until you’re able to get approved.