What Is Manual Underwriting and How Does It Work?

Underwriting is a process in finance where institutions evaluate and manage financial risk. This assessment is used across sectors like loans, insurance policies, and investment securities. Underwriters analyze an applicant’s financial background to establish appropriate terms, rates, or premiums for assuming a specific risk. This review helps ensure financial stability for both the institution and the applicant.

What is Manual Underwriting

Manual underwriting involves a human underwriter reviewing an application and supporting documentation to determine risk. This contrasts with automated systems, which use algorithms and pre-programmed criteria. The manual process emphasizes human judgment, allowing for a nuanced evaluation of an applicant’s financial standing. Loan officers or dedicated underwriting departments typically perform this assessment.

This method requires examination of an applicant’s financial history, employment, assets, and liabilities. Unlike automated systems that might reject applications not fitting strict parameters, manual underwriting offers flexibility. It provides an opportunity for applicants with unique financial situations to present their financial picture, potentially leading to approval an algorithm might miss. The human element allows for discretion and a deeper understanding of individual circumstances.

Reasons for Manual Underwriting

Manual underwriting becomes necessary when automated systems cannot assess risk or an application deviates from standard criteria. Complex financial situations often require this human review, such as for self-employed individuals with fluctuating or non-traditional income sources. Automated systems struggle to interpret varied income streams, making a human underwriter’s analysis essential to determine stable income.

Applications with credit history anomalies often require manual underwriting. This includes individuals with no credit score, a thin credit file, or past financial events like bankruptcy or foreclosure. While an automated system might deny such applications, a manual underwriter can consider mitigating circumstances or alternative credit data, such as consistent rent or utility payments over 12 months. Applications for unique property types or those with high debt-to-income (DTI) ratios exceeding automated limits also require manual assessment. For instance, some Federal Housing Administration (FHA) loans may mandate manual underwriting if credit scores are below 620 or DTI ratios exceed 43%.

The Manual Underwriting Process

The manual underwriting process begins after an applicant submits their loan application and required documents. While an application may first pass through an Automated Underwriting System (AUS), a “refer” or “eligible” outcome often routes it to a human underwriter for review. The underwriter then examines the financial information to ensure it meets lending guidelines and assesses risk.

During this phase, the underwriter analyzes data, looking for consistency and risk factors. They scrutinize debt-to-income ratios, review payment histories, and evaluate income and employment stability. If inconsistencies or questions arise, the underwriter communicates with the applicant, often requesting additional documentation or a letter of explanation for financial events or credit anomalies. This communication clarifies the applicant’s financial narrative. The underwriter’s objective is to build a financial profile, leading to a decision to approve, deny, or conditionally approve the loan.

Information Reviewed During Manual Underwriting

Underwriters examine documents to assess an applicant’s financial stability and repayment capacity. Income documentation includes pay stubs covering the last 30 days and W-2 forms from the past two years. For self-employed individuals, underwriters require personal and business tax returns (such as IRS Form 1040, 1065, or 1120S) for the most recent two years, along with profit and loss statements and business bank statements. This allows for cash flow analysis to determine stable earnings.

Asset verification involves reviewing bank statements and statements from investment or retirement accounts to confirm available funds for down payments and reserves. Credit reports are thoroughly analyzed beyond just a score, focusing on payment history, open and closed accounts, and any derogatory marks like late payments, collections, or bankruptcies. For applicants with limited or no traditional credit history, underwriters may consider alternative data such as consistent rent, utility, or insurance payments over a 12-month period. Employment history is also verified to ensure stability, often requiring a Verification of Employment (VOE). For mortgage applications, property documents like the appraisal report are reviewed to confirm the property’s value, and a title report ensures clear ownership.