Applying for a mortgage can be one of the most stressful parts of buying a home, especially when your financial situation doesn’t neatly fit the standard underwriting guidelines set by your lender.
If your financial situation is more complicated than the average buyer’s, manual underwriting can improve your chances of being approved. Unlike automated underwriting, which uses a computer program to review your application and evaluate your creditworthiness, manual underwriting employs a person to crunch the numbers.
What is manual underwriting?
Manual underwriting is the process by which an underwriter takes a detailed look at your financial information to make sure you’re qualified for a home loan. Some factors they’ll look at include:
- Debt-to-income ratio (DTI)
- Credit score
- Employment
- Cash reserves
Some mortgages require manual underwriting if the automated underwriting system (AUS) reviewing your application denies you approval. For example, FHA loans and VA loans that don’t meet the lender’s minimum standards are flagged automatically for manual underwriting.
Learn: How to Get a Mortgage
Manual underwriting vs. automated underwriting
With automated underwriting, the lender uses an AUS — such as Fannie Mae’s Desktop Underwriter — that analyzes the data from your loan application. Lenders prefer automated underwriting as it streamlines the underwriting process and provides more consistent evaluations.
Once your data is entered into the system, the AUS can either approve your application or refer it to manual underwriting.
The underwriting process varies in length. It can take anywhere from a few days to a few weeks (or even longer in busier periods). If your loan requires manual underwriting, the process will take a little longer to complete due to the extra work and documentation involved.
Keep Reading: How to Buy a House: Step-by-Step Guide
Who might benefit from manual underwriting
Lenders run mortgage loan applications through their automated system as a first step, and if necessary, turn to manual underwriting or blended underwriting to work toward approval. You can also request your lender to manually underwrite your loan if you feel your financial situation warrants it.
Here are some situations where manual underwriting can work in your favor:
You have a non-traditional income
If you’re self-employed and want your self-employment earnings added to your income calculation — or you need to document self-employment income as a source of your cash reserves — you can do so as long as you use a lender that’s willing to manually underwrite your home loan.
Jumbo loan
The 2024 conforming loan limit for most one-family homes is $766,550 to $1,149,825, depending on location. Mortgage loans for more than the conforming limit are called jumbo loans.
These loans are risky for lenders because of their size, so if you apply for one, you can expect the lender to underwrite the loan manually, as they’ll want to scrutinize your financial history in greater detail.
You have a poor credit history
A previous foreclosure, deed in lieu of foreclosure, or short sale might lead the AUS to reject your application. Similarly, a history of late debt payments or a low credit score puts you in a tough position to get approved.
Manual underwriting might reveal positive factors like strong income or cash reserves and allow you to prove you can handle the monthly payments.
You have an insufficient credit history
Lenders like to see lines of credit — also referred to in the industry as “tradelines” — because they show you’ve managed your debt over the last year or two. If you don’t have an established credit history, manual underwriting can build one from non-traditional tradelines like rent and utility accounts.
Learn more: Letter of Explanation for a Mortgage: Template and How to Write One
What manual underwriters consider
Manual underwriters consider many factors related to a borrower’s finances. Ultimately, what they want to see is that you have enough income and assets to repay your mortgage loan. To do that, they’ll consider several factors.
Income
The underwriter will calculate your income from all sources, including non-traditional sources like self-employment. Lenders like to see steady income and stable employment, such as a history of working for the same company.
Credit history
The manual underwriter will take a close look at the details of your credit history. They’ll look for a recent history of on-time payments as well as steps you’ve taken to strengthen your credit.
They’ll also verify that your credit scores pass muster. Typically, you’ll need a 620 credit score for a conventional loan, 680 for a jumbo, and 500 for an FHA loan (580 if you’re paying less than 10% down).
Although Veterans Affairs and the U.S. Department of Agriculture don’t set minimum scores for VA and USDA loans, many lenders impose their own 620 minimum for VA and 680 for USDA-guaranteed mortgages.
Qualifying ratios
Qualifying ratios help a lender determine whether or not you’re capable of paying back the mortgage. The two types of qualifying ratios are front-end DTI and back-end DTI:
- Front-end DTI: A measure of your housing-related debts (for example, what your expected new mortgage payment, taxes, and insurance would be) compared to your monthly income.
- Back-end DTI: A measure of all your debts compared to your monthly income. This ratio is most widely used by lenders.
Down payment
How much down payment you need — and whether you need one at all — depends on the type of loan you’re applying for. Generally, however, the more you can put down, the more likely you are to be approved for the loan.
Loan-to-value ratio
The loan-to-value ratio shows what percentage of the home’s value you need to finance. It’s determined by subtracting your down payment amount from the home’s value.
So, for example, if you want to purchase a $200,000 home with 10% ($20,000 down), your loan-to-value ratio would be 90%. Some programs will accept an LTV as high as 97%.
Cash reserves
Your savings are referred to as cash reserves, and manual underwriters look at those funds in terms of how many months’ worth of expenses they’d cover.
The underwriter also makes note of where the funds came from — such as your regular salary, or from gifts. If some came from gifts, they would want to know what percentage.
Good to know:
Not all loans allow you to use gift money for a down payment. And even if yours does, you’ll likely have to submit a “gift letter” from the contributor stating you don’t have to repay the money.
How to prepare for manual underwriting
You’ll be required to submit a number of documents with your mortgage loan application, which initially will undergo automated underwriting. Some of these documents might include:
- 30 days’ worth of pay stubs
- Two most recent bank statements and brokerage statements
- Two years worth of W-2 and/or I9 forms
- Two years of personal income tax returns
- Documentation showing balances and payments on loans
If the AUS bounces your application back for manual underwriting, you might have to submit additional documentation. This might include:
- Balance sheets, profit and loss statements, client letters, and other evidence of non-traditional income
- Business license
- Additional bank and brokerage statements
- Bankruptcy discharge documentation
- Verification of rent payments, such as canceled checks, credit card statements, or statements from a rent-reporting service.
