If you don’t fall under the normal umbrella that lenders require, you may need what they call ‘manual underwriting.’ While it’s not a bad thing necessarily, it can take a little more time to get your loan through the process.
Automated Underwriting – What is It?
If you are a typical borrower with good credit and decent debt ratios, your lender can probably run your information through an automated underwriting system. Basically, the underwriter inputs the information you provide, such as your income, debts, and credit score and the system spits out a result. Usually, the loan officer has to ask for a few more documents from you and then run that information back through the system.
Once you satisfy all of the requirements, the system issues what they call a ‘clear to close.’ This means you are free to schedule your closing and become a homeowner. When you don’t quite meet the standards a loan program requires but you are still a good candidate, the automated system may not work. That’s when manual underwriting can help.
Manual Underwriting – What is It?
Rather than the underwriter plugging your information into a computer and getting an answer, he/she must evaluate your file by hand. The underwriter will look at your credit report, income documents, current debts, assets, and employment information. The underwriter will likely ask for more documents to prove certain aspects of your loan and make a decision from there.
Manual underwriting is different because you have a human evaluating your documents very closely. They could catch things easier and make the approval process a little tougher. If you aren’t a good candidate for automated underwriting, you’ll need to come up with some compensating factors that make the lender want to give you a loan.
Bring Compensating Factors to the Table
If you don’t meet the requirements to go through automated underwriting, it usually means that you have a high debt ratio, low credit score, or shaky employment. The automated system probably gave you a result of ‘refer’ which means let a loan officer look at the file. The automated system saw something of value in your application, so they didn’t’ deny it, but they want a human to look over your file.
Because of this close evaluation and your risky qualifying factors, you should have some compensating factors that could include any of the following:
- Assets on hand – If you have liquid assets available to help you should your income stop or an emergency arise; it can help your case. Lenders like to see that you have another way to pay your mortgage that doesn’t strictly rely on your income.
- No or little payment shock – Your payment shouldn’t increase much more than you are used to paying now. If you rent, your new mortgage payment shouldn’t be much more than your current rent payment. If there’s too much of an increase, it’s called payment shock and it could make it hard to get approved.
- Low debt ratio – It’s a good idea to enter manual underwriting with little to no debt. If you have too many debts, an underwriter will not feel comfortable lending you more money.
- Stable employment – A long history at the same job shows a lender that you are stable and reliable. If you recently changed jobs or you change jobs frequently, it could make it hard for you to get approved.
There’s never a guarantee of whether or not you will get approved. Each lender and loan program has their own requirements. Even if you qualify for automated underwriting, there’s no guarantee a lender will give you the loan. The best thing you can do is maximize your qualifying factors and make sure that you are able to answer any questions truthfully for the lender.