Mortgage underwriting is the review process in which a lender evaluates the risk of a borrower and a property. Through this process, the lender determines whether to qualify the borrower for financing, and how much to lend if approved.

Underwriting can be an automated process or a manual one, or both. Here, we break down manual underwriting and what borrowers can expect.

What is manual underwriting?

When a mortgage application is manually underwritten, the application is reviewed by an underwriter, not an automated system, such as a program or software. The underwriter looks at factors like the borrower’s debt-to-income ratio, loan-to-value ratio, credit score and history, assets, liabilities, income and employment.

Manual underwriting is typically used when an application would likely be denied through an automated system, or if the borrower has some unique circumstances but is otherwise qualified.

When an automated system denies an application, a lender can turn to manual underwriting to qualify a borrower. For borrowers with credit dings, a lot of debt payments, thin savings or unusual financials, manual underwriting can be the key to obtaining a mortgage.

Some types of mortgages require manual underwriting if the borrower doesn’t meet certain standards. For instance, FHA loans require manual underwriting when a borrower has a credit score of 620 or below and a debt-to-income ratio of 43 percent or more. Through manual underwriting, these kinds of borrowers may still be able to get financing.

How does manual underwriting work?

With manual underwriting, expect to go through a lot of the same steps as typical automated underwriting.

It all starts with gathering the documents your lender asks for. That can mean getting things such as:

  • Bank statements
  • Tax returns
  • Brokerage statements
  • Proof of employment
  • Paystubs
  • Verification of your assets

For manual underwriting, lenders may ask for more historical information. For example, typical underwriting might only ask for your most recent two or three statements but manual underwriters might want six months of your financial history.

The underwriting will take those documents, look over your credit report, and consider all of the aspects of your finances. Do you have a history of timely payments? How much debt do you currently have and what is your income? Could you reasonably make the payment on a new loan? What collateral are you offering and how much is it worth?

Based on all of these factors, the underwriter makes a decision on whether to deny your application, approve it, or approve it with contingencies, such as requiring more documentation.

Manual underwriting vs. automated underwriting

In the past, all mortgage applications were manually underwritten. Today, there are three basic approaches:

  • Manual underwriting
  • Automated underwriting
  • Blended underwriting

Automated underwriting is just as it sounds: underwriting completed through an automated system, usually much more quickly than the manual process. Blended underwriting is a hybrid method that allows lenders to use both automated and manual means to qualify a borrower. A lender may want to go the blended route to avoid having a qualified borrower rejected or an unqualified borrower mistakenly approved.

With automated underwriting, it may be possible for your lender to obtain information about you electronically, which can speed up the process compared to manual underwriting. With your permission, your lender can gather account information directly from your bank, retirement fund or stock brokerage, and can access your tax returns. Because of this, the majority of your loan can be underwritten within minutes.

However, an automated system may have trouble understanding situations that don’t readily compute. Say a qualified borrower was contacted by her lender to ask why her income had decreased — “that’s what the automated system said.”

In fact, the borrower’s income had increased. It turns out, she worked for a company that was bought by a larger firm in the past year, but her wage information seemed to show — to the computer — that she lost her job with company No. 1 and wasn’t earning very much working for company No. 2. Once the situation was properly documented, her application was approved.

You can request manual underwriting if you believe your particular situation will not be fully understood by an automated system. If you have a solid credit score, healthy reserves and limited monthly obligations, however, you’re likely to do well with automated underwriting.

Underwriting different types of loans

The underwriting process can depend on the type of loan you’re applying for.

Conventional loans

Conventional loans are those that meet standards set by Freddie Mac and Fannie Mae, government-sponsored enterprises that buy mortgages.

Most of these loans use automatic underwriting, but manual underwriting is an option. If manual underwriting is used, the loans still have to conform with the requirements.

Jumbo loans

These loans don’t conform to Freddie and Fannie’s requirements, which means they have fewer restrictions and regulations to worry about. This makes manual underwriting far more common for jumbo loans, especially those for particularly large amounts.

FHA, VA, or other government-backed loans

The government sponsors loan programs through the FHA, VA, USDA, and other agencies. Most of these loans use automatic underwriting, though manual underwriting can be permitted, or even required in some cases.

For example, for FHA loans where the applicant’s credit score is under 620 or debt-to-income exceeds 43%, lenders must use manual underwriting.

Applicants that are rejected for USDA loans during automated underwriting can request manual underwriting to try for approval a second time.

When do lenders manually underwrite?

Lenders typically use manual underwriting when you have an unusual situation that makes automatic underwriting difficult.

Automatic underwriting relies on formulas that require inputs such as traditional income sources, credit history, and the like. While it may work for most people, automated systems don’t work for everyone.

Some scenarios where lenders use manual underwriting can include:

  • You have no credit history: If you’ve never had a loan or credit card, you won’t have any credit score, so the automated system can’t rely on this metric to make an approval.
  • You have minimal credit history: Similarly, if you don’t have a long credit history, the system might not be able to use the information that is there to make an accurate decision about your creditworthiness.
  • You have a foreclosure or bankruptcy on-record: Having these negative marks on your credit can make getting a loan through automated underwriting all but impossible. Lenders might be willing to underwrite your loan manually if you’ve turned things around, have a strong source of income, and a large down payment.
  • High debt-to-income: Having a high DTI ratio is usually disqualifying. However, if you can show a manual underwriter that you have a good reason for high DTI and that you can easily handle the payment or that your DTI is about to drop, you might be able to secure an approval.

How to prepare for underwriting

Whether your mortgage application is underwritten by a computer or manually, your lender will ask you to provide documentation about your financial situation. Lenders need this information to be able to verify your ability to repay the mortgage, so preparation is key.

Create a folder with the information you’ll need, including:

  • W-2s and tax returns from the past two or three years
  • Your last two pay stubs
  • Account statements (banking, CDs, mutual funds, retirement, etc.)
  • Documents for other income (e.g., alimony, bonuses, disability or pension)

In addition, if you’re receiving a gift to help with the purchase a home, the lender will want to confirm that the gift is really a gift and not a loan, so have a gift letter prepared ahead of time.

Tips for the manual underwriting process

If your mortgage application is likely to be manually underwritten, there are some steps you can take to help ensure the outcome is in your favor.

    1. Understand that behind the process is a person who needs to ensure each borrower meets specific benchmarks. That person is just like you — someone who wants to do a good job with as little hassle as possible. The underwriter also wants to get everything right in part because loans can be audited. Terms like “please” and “thank you” can go a long way.
    2. Have your documents organized and ready to go. Always have backup copies in case the loan officer loses something.
    3. If your application is being taken in person, ask the loan officer if you can provide paperwork then and there — that can help hasten things.
    4. Even if you’ve submitted what seems like a mountain of paperwork, expect your underwriter to ask for additional documentation. It’s just part of the process.
    5. Before you begin to buy a home or refinance, it’s a good idea to get preapproved. A preapproval can help uncover potential problems from the start, before manual underwriting takes place.