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

You might be surprised to know that, in most cases, it’s a computer making that decision — an algorithm that assesses how risky a prospect you are. But sometimes, it’s still a good old human being behind the decision. When it is, it’s called manual underwriting. 

Let’s evaluate manual underwriting, when it’s used over (or with) automated underwriting, and what borrowers can expect from the process.

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 with 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.

While efficient, automated underwriting does not always make the best business decisions. Software may struggle to piece together financial circumstances that are not linear. For instance, a corporate buyout may make employees appear to have been laid off on paper, when in fact, they may have assumed a higher-paying role at the new company. Or a single overdraft may flag a borrower as being a lending risk, even if they reliably pay back their debts. These are cases wherein manual underwriting can help to determine risk more accurately– and with more nuance– than a software program. 

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.

When do lenders manually underwrite?

Lenders typically use manual underwriting when they 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 scanty information 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 ratio: 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. 

Underwriting different types of loans

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

Conforming loans

Conforming loans are those that meet standards set by the Federal Housing Finance Authority (FHFA), allowing government-sponsored enterprises Freddie Mac and Fannie Mae to buy them on the secondary mortgage market.

Most of these loans use automatic underwriting, but manual underwriting is an option. If manual underwriting is used, the loans still have to conform to specific 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 U.S. government backs or insures loans 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.

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 available for the sake of convenience and efficiency. 
  3. If your application is being taken in person, ask the loan officer if you can provide paperwork on the spot — that can help streamline the process.
  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 for the mortgage. A preapproval can help uncover potential problems from the start, before manual underwriting takes place.

How to prepare for manual 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.

Bottom line on manual underwriting

While automated mortgage underwriting helps many borrowers to qualify for a loan with speed, some applicants will still benefit from the involvement of a human professional. If your circumstances are complicated or unconventional, you may consider asking your lender about manual mortgage underwriting as a pathway to qualifying for a loan. Though you may expect this to take longer than the automated process, you can keep the process moving smoothly by organizing your records well in advance.

To get a jump-start on the mortgage application process, we recommend pulling together the documentation you’ll need before approaching prospective lenders. Doing so will help you take steps toward a loan preapproval and be prepared for underwriting when the time comes.

Additional reporting by Meaghan Hunt