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What Is Manual Underwriting?

If you have great credit and plenty of assets, it is fairly easy to get approved for a mortgage loan. However, borrowers who have credit issues, complex earnings, or other nuanced circumstances may require a more hands-on approach. In this case, manual underwriting may be beneficial.

Because manual underwriting uses a person rather than a computer system to review your information, it may improve your chances of approval. This is particularly true if your financial situation does not fit perfectly into the mortgage underwriting guidelines. These guidelines were created by the government to protect consumers, but it makes getting a loan more difficult for some people. Here is a closer look at the specifics regarding how manual underwriting works and some steps you can take to prepare.

How Mortgage Underwriting Works

Mortgage underwriting is the process a lender goes through to evaluate the risk of lending money to a borrower. It typically involves a review of the borrower’s finances, employment, and credit history, as well as an assessment of the property itself.

Ultimately, the purpose of underwriting is to determine whether the borrower is likely able to repay the loan. When the underwriting process is complete, the lender decides whether to approve the borrower for financing and how much to lend, or to deny funding to the borrower for buying a home.

Today, most lenders use an automated underwriting system (AUS) to approve or deny borrowers, which allows for much faster loan processing. Traditional lenders offering loans to people living in a residential home must follow a federally regulated and standardized loan application called URLA or Form 1003. This makes automatic review much easier for borrowers with straightforward income, employment, and credit situations, but difficult for others.

When borrowers do not fit into the preset guidelines, lenders may choose manual underwriting. This allows a human to review your application and supporting documentation to determine whether you are eligible for a mortgage loan. Manual underwriting typically requires more paperwork and takes longer than the automated process. Ultimately, a manual underwriting mortgage can take anywhere from a few days to a few weeks longer than standard underwriting before it’s approved.

Who Needs Manual Underwriting?

In some cases, a lender can recognize the need for manual underwriting right away based on a person’s application. The automated underwriting system will confirm this by noting a “refer” recommendation, which prompts the lender to take a deeper look into the issues identified by the AUS system.

A borrower may find that manual underwriting is beneficial and/or necessary if they have unusual circumstances such as:

  • Little or no credit history, either due to being a younger borrower or choosing to live a debt-free life
  • Past financial problems, such as bankruptcy or foreclosure
  • High debt-to-income ratio (DTI) that’s temporary or a normal part of your business endeavors
  • Applying for a jumbo loan, which is a loan greater than the conforming limit. This is $647,200 in 2022 for most single-family homes. However, note that the conforming limit is likely to increase to $715,000 for 2023.

What Manual Mortgage Underwriters Look At

If your file cannot be approved under normal circumstances, you will enter manual underwriting as a secondary option. Once an underwriter is assigned to your case, they take an in-depth look at your circumstances to determine whether you are eligible for a mortgage loan. This involves evaluating three distinct groups of information, known as the “three Cs” of underwriting: credit, capacity, and collateral.

1. Credit

Your credit history is a primary factor that determines whether you are eligible for a loan. Your mortgage loan underwriter reviews your credit report to get an idea of how you have handled your debt repayments in the past. They look for a history of consistent, on-time payments and watch out for issues such as foreclosures, credit and mortgage delinquencies, bankruptcies, and liens.

If you do not have much credit history, your underwriter may ask for proof of other on-time payments. This may include insurance payments, rent, utility payments, or even payments for recurring subscriptions like gym memberships. The underwriter also needs to confirm that you meet the minimum credit score, which is typically 620 for a conventional loan, 500 for an FHA loan (580 if you’re putting down less than 10%), and 700 for a jumbo loan.

2. Capacity

The term capacity refers to your ability to repay your loan. In this stage of the manual underwriting process, the underwriter takes a look at your income, employment, assets, and liquid cash reserves. They also evaluate your debt-to-income (DTI) ratio, which compares the total amount of your debts to your monthly income.

For manually underwritten loans, Fannie Mae and Freddie Mac’s maximum DTI is 36% of your stable monthly income. In some cases, a maximum of 45% may be acceptable if you meet the reserve and credit score requirements. There are some other exceptions and differences when pursuing FHA, VA, or USDA loans.

3. Collateral

Finally, the collateral portion of manual underwriting involves assessing the value of the property you are planning to purchase. To limit risk, lenders use a metric called Loan to Value or LTV. This evaluates your loan amount compared to the market value of the home. This requires a property appraisal to verify the property’s condition and estimated worth. A licensed appraiser will evaluate and determine a home’s value and price, which helps the lender determine how much they could reasonably lend compared to the value of the home in case the borrower defaults.

Once the appraisal is complete, an underwriter will use the information to determine the property’s loan-to-value. If this ratio is above 80%, the loan is considered high-risk, and the lender may require you to purchase lenders’ mortgage insurance or make a larger down payment. Mortgage insurance is essentially an extra fee you pay every month for not having a lower LTV.

How to Prepare for Manual Mortgage Underwriting

If you are getting ready to get a mortgage and you have concerns about your finances, you may need to prepare for manual underwriting, so keep in mind that the process may take longer than usual. Try to prepare your documentation before you apply and be sure to respond quickly to requests, as this helps to keep the process moving.

Some of the items you may need to provide include:

  • Your two most recent bank and brokerage statements
  • Two years of W-2 and/or 1099 forms
  • 30 days’ worth of pay stubs
  • Two years of personal income tax returns
  • Documentation showing loan balances and monthly payments
  • Documentation of other income (ex. pension, disability, child support, and alimony)

This information provides the underwriter with the basics they need to evaluate your income and assets. They may also request additional supporting documentation, such as:

  • Bankruptcy discharge documentation
  • Copy of your business license
  • Profit and loss statements, balance sheets, client letters, or other evidence of non-traditional income
  • Additional brokerage and bank statements
  • Copies of insurance policies
  • Divorce decree(s)

The Approval Process

There are 5 basic stages of the mortgage process. This takes you from the initial application to purchasing your new home.

1. Prequalification / Preapproval

In this first phase, a loan officer, or mortgage broker, will review the mortgage application you have submitted. This step is to verify that your basic information is captured correctly, such as your name, address, and social security number. During this phase, your credit will be pulled and analyzed to determine your score and evaluate whether or not your debt is being paid. Income is also calculated to determine your DTI and how much home you can afford based on your annual salary.

Prequalification is a general indication that you can qualify for approval if you decide to formally apply and generally does not require the submission of formal documents. Preapproval informs a borrower that they have met all of the basic conditions for loan approval, assuming all of their information is correct and that their financial situation remains the same until a home is purchased. This preapproval will indicate the exact price of the home you can purchase.

2. Under Contract

In the next step of the process, after you have decided on a home you would like to buy and had your offer accepted by the seller, you will be “under contract” to buy the home. When under contract, you evaluate the home with inspections.

At the same time, an underwriter looks over your application, requesting letters of explanation for certain circumstances, and confirming your income and employment. For example, when there are large deposits into your bank account, missing pages, blurry pictures, or gaps in employment, underwriters may request more information from you to better clarify and understand your circumstances.

3. Appraisal

Once you have found the property you want to buy, the lender needs an appraisal to confirm the loan-to-value ratio. This helps ensure that you are not borrowing more than your property is worth. The official appraisal report contains important information about the property including the square footage, current condition, and sales data.

The title search confirms that the property does not have any legal claims on it. During this phase of the process, your lawyer reviews the property’s history and looks for issues such as unpaid taxes, liens, claims, and pending legal actions.

If the search finds that the title is clear, a title insurance policy is issued to guarantee the accuracy of the search. In some cases, there are two policies: one to protect the lender and the other to protect the property owner. The lender policy is more expensive and must be paid, whereas your policy is optional.

5. Decision

Finally, it is time for the lender to make a decision. After going through the steps above, the underwriter determines whether or not you qualify for a mortgage loan.

Manual Mortgage Underwriting Decisions

Manual underwriting looks for extenuating circumstances that a borrower can explain. Everything in manual underwriting has to be explained to underwriting so they understand why you are in a certain financial situation. Incorrect information on your credit report is an example of an extenuating circumstance.

Providing documents to support your explanation is the key to getting approved. For example, this could be a divorce decree, medical reports, job severance papers, or notice of a job layoff. These could help explain a lower credit score or missed payments.

If the underwriter was unable to verify certain things, such as your employment or your income or your circumstances, then your application may be suspended. If this happens, you can speak to your lender about whether you can provide additional documentation and keep the review process moving forward.

In some cases, the underwriter may determine that you have insufficient income, too much debt, or other issues that preclude you from loan approval altogether. However, it is important to note that a denial does not permanently close the door for you. You may be able to take steps to address the issue and re-apply in a few months, possibly for a smaller loan, a different loan, or different terms.

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