If there’s anything ‘unique’ about your mortgage application, you may hear the term ‘manual underwriting.’ Lenders reserve this technique for borrowers that show potential but don’t pass the automated underwriting programs that breeze borrowers through the process.
Manual underwriting is like a second chance at approval. If the automated system kicks you out, the loan officer may see promise in your application. Maybe you have a unique situation that the automated system can’t understand, but a human could.
What does manual underwriting look like? Keep reading to find out.
What Underwriters do in Manual Underwriting
Underwriters are always a part of the process when you apply for a loan. Even if you get approved through an automated system, an underwriter must review your supporting documents to make sure they meet the program’s requirements.
The same thing happens with manual underwriting. Instead, of having a computer approve your loan, though, the underwriter does the calculations and approves the loan. The underwriter calculates your debt-to-income ratio and LTV. He or she also looks closely at your supporting documents, such as your paystubs, W-2s, tax returns, and bank statements. He or she carefully evaluates your ability to repay the loan and qualify for the loan program.
Why Would you Need Manual Underwriting?
There could be a thousand reasons you may need manual underwriting, but the most common reasons include:
- Not enough credit – Maybe you don’t have ‘bad’ credit, but you don’t have any credit. Lenders need to see some type of payment history to determine if you make good on your debts. Some lenders may be able to work with alternative credit, such as a rent history or utility payments. Lenders typically want at least three alternative credit lines to verify your ability to pay your debts on time.
- High debt ratio – If your debt ratio exceeds the program’s requirements, you may need a human underwriter to look at your application. If you can comfortably afford the higher DTI, a lender may approve it if you have compensating factors. Lenders like to see a large amount of assets, high credit scores, or very stable employment in order to accept a higher than normal debt ratio.
- New job – If you’ve recently changed jobs, automated systems may kick your application out. That doesn’t mean that you can’t get approved. If you have experience in the industry or you recently underwent training or a specific education for the new job, you can prove to a lender that you qualify for the loan even with the new job.
- Recent bankruptcy or another negative credit event – Most loan programs have a specific waiting period after you have a negative credit event. If you need an exception to the rule, you may need an underwriter to manually review your application.
What to Expect
If you have to undergo manual underwriting, know that you’ll need to provide more documentation. Automated approvals are often more streamlined. You can get by with just your paystubs, W-2s, tax returns, and bank statements.
With manual underwriting, you may need more. Lenders often need Letters of Explanation for each unique scenario. They need to know why it happened and what you’ve done to fix the situation. Oftentimes you must also include documentation supporting what you wrote in the letter.
Underwriters may also ask for more proof of your income, assets, and debts. If they have questions about something, they’ll ask for even more documentation. Every little thing will need to be documented and proven in order for the lender to feel comfortable manually approving your loan.
Increasing Your Chances of Approval
How do you increase your chances of approval with manual underwriting? It comes down to a few simple things:
- Maximize your credit score – Work on your credit score long before you apply for the loan. The higher your credit score is, the lower risk of default you pose. Credit scores are one of the first things lenders look at, so make yours as high as possible.
- Keep your debt ratio low – Lenders take a risk manually underwriting loans. If your debt ratio is high, that’s another risk factor that they may not want to accept. Try paying off as many debts as you can before you apply for the loan.
- Make a large down payment – Put down as much money as you can on the home. The more ‘skin in the game’ that you have, the lower your risk becomes. Lenders like when borrowers invest their home money. It makes you more likely to do whatever it takes to make your payments on time.
- Have reserves – The more money you have on hand aside from the down payment and closing cost money, the more likely you are to pay your loan on time. Lenders see reserves as a compensating factor and often use it for approval purposes.
Manual underwriting may take more time and seem more tedious, but it may get you the loan you need. Make sure you are honest with the underwriter and provide the documentation he or she needs to get the process going.