What is manual underwriting and how does it work?

Underwriting is the step in the mortgage process when your lender reviews your finances to determine whether you qualify for a loan and what terms to offer. There are two ways that a lender can underwrite your loan: automatically or manually. If you have a unique financial situation, you might be able to increase your chances of getting a loan with manual underwriting. Here’s a rundown of some of the differences between manual and automated underwriting and examples of when manual underwriting is necessary.

What is manual underwriting for a mortgage?

When you apply for a mortgage, your lender decides if you qualify for a loan by looking at your finances to determine if you’ll be able to repay it. Most times, the decision is made by automated software - not a human being. If you have a thin credit file, high debt-to-income ratio (DTI), or poor credit, you can expect to be denied by the algorithm.

Manual underwriting means your application will be reviewed by a human who can understand the nuances of your financial situation. This can be a helpful option for borrowers who have the income to keep up with mortgage payments, but who don’t fit the typical profile of a qualified borrower.

Manual underwriting vs. automated underwriting

Even with technology, there’s a need for human involvement and insight in the mortgage process.

How automated underwriting works for mortgages

Automated underwriting uses a computer algorithm to underwrite your loan. The algorithm takes your financial information and uses it to decide whether you meet the lender's minimum standards.

With just a small amount of inputted information - like your Social Security number and address - the system can learn about your finances. The automated system compares your credit score, debt, income, and other factors to the requirements and guidelines of the loan you’re applying for. The machine does most of the heavy lifting. After the computer draws a conclusion, your lender will briefly double-check the result and issue a decision. Lenders use automated underwriting because it’s much faster and more cost-efficient than manual underwriting.

How manual underwriting works for mortgages

Manual underwriting is performed by a human instead of a computer program. Manual underwriting takes more time than automated underwriting and requires more documentation. However, if you have a unique financial situation, manual underwriting can improve your chances of getting a loan.

When is manual underwriting done?

A lender might choose to manually underwrite a loan under a few circumstances:

• You’re living debt-free. Paying back debt is the foundation of a great credit score. But if the borrower chooses to live without debt, they might not have enough credit to demonstrate they’re a reliable borrower.
• You’re new to building credit. Building credit can take years. If the borrower is a young adult or they’ve just moved to the United States, they may not have a credit score.
• You’ve had financial problems in the past. Buying a home with a bankruptcy or foreclosure in your past can be a red flag to lenders. Manual underwriting can help highlight compensating factors like a high income and savings.
• Your debt-to-income ratio is too high. If you have a lot of debt but you can show that it’s temporary or a normal part of your business endeavors, manual underwriting can help you get mortgage approval.
• You’re self-employed. If you work for yourself, your lender is going to want to see your profit-and-loss statements.

Manual underwriting and your mortgage

Your underwriting options will depend on the type of mortgage you’re seeking.

Conventional mortgage

A conventional loan is originated by a bank or mortgage company and sold to Fannie Mae or Freddie Mac. This allows the lenders to have the liquidity, or cash on hand, to continue originating mortgages. Rocket Mortgage proudly offers conventional loans.

To sell their mortgages to Fannie Mae and Freddie Mac, lenders must conform to their requirements. Fannie and Freddie use automated systems to complete their initial assessment of a mortgage applicant. Lenders can assign your application for manual underwriting, but they’re not required to do so.

Jumbo loans

Jumbo loans are nonconforming loans, which means that they’re not subject to regulations, except for those dealing with nondiscriminatory lending practices. Although lenders are automating the jumbo mortgage application process, there’s still a need for manual underwriting in the jumbo loan market, particularly for home loans exceeding $2.5 million.

Rocket Mortgage offers Jumbo Smart loans up to $5 million.

Government-backed mortgages

Lenders who offer government-backed mortgages - like FHA, Department of Veterans Affairs (VA). or United States Department of Agriculture (USDA) loans - must comply with agency rules regarding manual underwriting.

FHA loans

FHA manual underwriting guidelines require that mortgage applications must be manually underwritten for applicants with credit scores below 620 or a debt-to-income (DTI) ratio that exceeds 43%.

FHA loans can be approved with credit scores as low as 580 or with a DTI of 50%, if the applicant can make a larger down payment than the required 3.5% or has any of these sufficient compensating factors, according to the U.S. Department of Housing and Urban Development:

• Verified and documented cash reserves that equal or exceed three total monthly mortgage payments (one to two units units) or that equal or exceed six total monthly mortgage payments (three to four units).
• A new total monthly mortgage payment is no more than $100 in value or 5% higher than their previous total monthly housing payment, whichever is less, and a documented 12-month housing payment history with no more than one 30-day late payment. In cash-out transactions, all payments on the mortgage being refinanced must have been made within the month due for the previous 12 months.
• Residual income.

VA loans

VA loan¹ applications are among those most referred for manual underwriting. That’s because VA loans are a way of giving back to our veterans as a thanks for their service, so lenders go out of their way to approve these loans if possible.

Those seeking a VA loan and facing a manual underwrite will likely need to meet tighter requirements for such factors as your DTI.

USDA loans

USDA loan applications that are rejected by that automated system can be resubmitted for manual underwriting. USDA applicants can also request that a manual process be initiated if they’re rejected by the automated system.

How does a manual underwriting mortgage work?

Here’s what to expect if your lender manually underwrites your loan.

Collection of your financial information

Before an underwriter can decide whether you qualify for a mortgage, they need to understand your financial situation. Your lender will ask you for quite a bit of documentation if they’re manually underwriting your loan. Some things you might need to provide include:

• Up to 12 months of bank statements
• Several years of tax returns
• Employment verification
• Recent pay stubs that prove you have consistent, reliable income
• Retirement and investment account statements
• Verification of any other assets you own, like vehicles
• Profit and loss statements if you’re self-employed or own a small business

For fastest results, it’s good to gather all this documentation on hand before your lender asks for it.

Review of your credit report

When your underwriter looks at your credit report, they aren’t just looking at your credit score. Your credit report shows your lender things like loans and credit accounts in your name, and it also contains information about any missed or late payments on these accounts. They’re also checking to see if you have a history of consistent, on-time payments.

During a manual review, the underwriter will look at:

• Good debt: Like student loans or a history of on-time installments.
• Revolving debt: Such as credit card balances.
• Delinquencies: Any missed or late payments.

If you have a thin credit file, they may ask for proof of "nontraditional" credit, like on-time rent, utility, or insurance payments.If there is a negative item, like a past bankruptcy, they may ask for a letter of explanation. This is a personal letter written by you that explains an item on your credit report – like a foreclosure or bankruptcy.

Review of your income and assets

Your lender will compare your monthly income against your projected mortgage payment to ensure you have plenty of breathing room. Some lenders may only check W-2s and pay stubs, while others might call your employer to verify your history with the company and any bonuses or commissions you earn. If they do call, you’ll need to sign a release form allowing them to speak with your employer.

They will also verify your assets — anything of significant value, like cash, retirement accounts, or brokerage funds. The goal is to ensure you can cover your closing costs and down payment and still have a safety net.

Review of your debt and liabilities

Your lender will next look at your debt and financial liabilities. Your underwriter will calculate your DTI – which shows how much of your monthly income goes toward expenses. If your DTI is high because most of your income goes to rent, loan, and credit card payments, that can prevent you from qualifying for a loan.

Lenders typically prefer a DTI that does not exceed 36%, though you can often qualify for a mortgage with a DTI of up to 50%. Lenders like to see a low DTI because it can signify that you aren’t overstretched in paying your bills each month.

Underwriters will also look at other regular recurring financial liabilities, like child support or back taxes.

Review of your collateral

Finally, the underwriter looks at your collateral - your down payment and the property’s value. You’ll typically need to make a down payment of at least 3%, though some government-backed loans do not require a down payment. Making a larger down payment reduces risk for the lender and can get you a lower interest rate.

The underwriter will comb through your bank statements to ensure these funds come from your savings or an allowable gift. Large, sudden deposits might trigger a request for an explanation and documentation, like a bill of sale if you sold a car to raise the cash.

Final decision

Your underwriter will then issue a final decision on your loan application. The underwriter can deny your loan, approve it, or issue a suspension with contingencies. If your application has contingencies, it means that your underwriter needs more documentation before they can approve you.

The bottom line: Manual underwriting is a more personalized approach

Manual underwriting can be a helpful tool for home buyers who have a unique financial situation. While it requires more documentation and time than an automated process, it offers a pathway for borrowers who are carrying a large amount of debt, have a thin credit file, or have had financial issues in the past. Manual underwriting can help give lenders context into your finances to help confirm you can afford your mortgage.

A Home Loan Expert can help you start your mortgage application with Rocket Mortgage today.

¹Rocket Mortgage is a VA-approved lender, not endorsed or sponsored by the Dept. of Veterans Affairs or any government agency.

Rocket Mortgage is a trademark of Rocket Mortgage, LLC or its affiliates.

Rocket Mortgage is not acting on behalf of FHA or HUD.